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In previous articles, we looked at how a three asset class SIB (one index fund per asset class) performed against a three asset class ESIB -- a portfolio with more than one fund per asset class -- in one case with tactical asset allocation and one case with strategic asset allocation.

We saw some minor benefits for the ESIB but the results were equivocal and could be chalked up to timing and not to anything systematic.

In this article, we are going to ask the same question with much more complex portfolios. A six asset SIB -- one index fund for each asset class, and a portfolio made up of funds taken from TD Ameritrade's 101 commission free ETFs, which break down into the following categories:

Asset Class Number of funds
Balanced Fund 4
Fixed Income 30
Commodity 3
Sector Fund 0
Foreign Equity 19
Emerging Market Equity 11
US Equity 27
Other 3
Total 101

With a tactical asset allocation strategy, there will be rotating asset classes and rotating styles. If we compare the returns from both plans, we see:

click to enlarge

Performance table (as of Jan. 19, 2011)

Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
TD Ameritrade Commission Free ETFs Tactical Asset Allocation Moderate 8% 61% 12% 86% 17% 110%
Six Core Asset ETFs Tactical Asset Allocation Moderate 8% 57% 11% 84% 15% 98%

Over the long term, there is about a 2% difference in returns based on the additional funds in each asset class.

We tracked the monthly holdings and recreated what the portfolio profile was for each of the last 14 months. When looking at detailed portfolio behavior, we see that both portfolios follow the same asset class rotation.

The fixed income asset class is always present and will never be less than 40% as dictated by the moderate profile. This is to be expected.

When looking at the holdings in more detail, we see a big variance:

In the case of the SIB Six, the only wiggle room was to choose between bonds (NYSEARCA:BND) and money market (Cash). It is possible to see that happening from time to time.

The TD Ameritrade plan had multiple funds in each asset class. It is most noticeable in the fixed income class where multiple choices were deployed.

It is interesting to note that international equities were not selected at any time during the study period.

The table below gives details of the holdings on a month by month basis:


  • With a six asset class portfolio using tactical asset allocation, there is much more trading activity than with a three asset class portfolio
  • For the last 14 months, the extra activity in the richer plan did not lead to better returns. This is an interesting reflection on a year where equities were strong and bonds were weak across the board
  • In the longer term, the richer plan does seem to provide opportunities to increase the returns (by approximately 2% in this case)

In the next article, we will contrast the buy and hold strategies and finally contrast the difference between buy and hold and tactical asset allocation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.