Large-Cap U.S. Equity Ranking of Asset Subclasses to Boost ETF Portfolios

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 |  Includes: IVV, IWB, OEF, RSP, SCHX, SPY, VOO, VTI, VV
by: MyPlanIQ

Increasing numbers of ETFs are becoming available, and it is possible to put together low cost and effective plans that can provide solid portfolios based on proven and trusted asset allocation strategies.

In previous articles we have noted variance in the returns of ETF portfolios based on the quality of the funds in the plan. For example, TD Ameritrade gives access to 101 ETFs, commission-free. We have built a plan to work with Folio Investing. Both give access to six asset classes, but the returns are different.

Performance chart (as of Feb. 2, 2011)

[Click to enlarge]

Performance table (as of Feb. 2, 2011)

Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate 14% 114% 9% 71% 13% 85%
MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation Moderate 16% 146% 5% 24% 7% 37%
TD Ameritrade Commission Free ETFs Tactical Asset Allocation Moderate 14% 117% 12% 79% 17% 105%
TD Ameritrade Commission Free ETFs Strategic Asset Allocation Moderate 13% 120% -0% -2% 6% 30%
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The returns can partially be explained by the additional funds made available by the TD Ameritrade plan (101) compared to 35 in our plan.

A key question is: How well do each of the ETFs perform, and what information is available to determine which ETFs are going to have an impact on my portfolio? If you have a large plan and an application that will do the searching for you, that's one thing. If you want to reduce the number of choices, it would be beneficial to sort out which ones to select.

In the next set of articles, we are going to examine the performance of popular ETFs and provide insight as to ETFs' returns performance. This is information you can use to determine which ETFs you want in your portfolio.

Our approach will be to rank ETFs in each asset sub-class or style by average trading volume. In our view, it is essential to have a fund that is heavily traded to ensure liquidity. We will then review the 5-, 3-, and 1-year returns and come up with a ranking based on this approach.

In this article we will deal with large cap blend and then proceed with styles for each of the different asset classes.

Ticker
Description
Avg Vol
SPDR S&P 500
168,811,000
iShares S&P 500 Index
3,246,650
Vanguard Total Stock Market ETF
2,541,800
iShares Russell 1000 Index
1,064,050
Rydex S&P Equal Weight
990,698
iShares S&P 100 Index
985,289
Vanguard Large Cap ETF
200,454
Schwab U.S. Large-Cap ETF
198,284
Vanguard S&P 500 ETF
196,018
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We selected the top ETFs based on value. We decided to have a cutoff below 900,000, which gave us six to analyze.

We extracted the returns and gave each fund a score based on the past performance and ranked the funds.

Ticker
Description
5 Yr AR%
3yr AR%
1yr AR%
Score
RSP
Rydex S&P Equal Weight
3.45%
3.58%
27.38%
40%
VTI
Vanguard Total Stock Mkt
2.12%
0.59%
23.75%
29%
SPY
SPDR S&P 500
2.07%
-0.11%
21.68%
26%
IWB
iShares Russell 1000 Index
1.51%
-0.07%
21.56%
24%
IVV
iShares S&P 500 Index
1.43%
0.67%
16.22%
20%
OEF
iShares S&P 100 Index
1.39%
-0.62%
14.07%
16%
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From this list, we pick the top three for further returns analysis.

Ticker
2005
2006
2007
2008
2009
2010
RSP
6.543
14.846
0.908
-40.055
44.072
20.504
VTI
4.473
14.824
4.559
-37.737
28.527
16.778
SPY
4.828
15.203
5.146
-36.795
26.352
14.584
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We note that RSP, which is an equal weight fund (as opposed to VTI and SPY) being proportional produces the highest returns in the 1-, 3- and 5-year categories but has the biggest drop in 2008 -- followed by the biggest recovery.

Selecting any of the tickers will provide more detailed analysis, including Sharpe and drawdown.

Takeaways

There are many ETFs for each subclass, and it pays to review their performance before selection. In this study, we have made an initial cutoff based on volume and then ranked on annual returns. There are more properties that can be measured, but this is the measure we are using.

In future articles, we will consider other subclasses or styles and put together a plan that supports a portfolio of the top picks by our measure.

Disclosure: I am long DBC, DJP, IJR, IWO.