Is the 'Lazy Portfolio' Strategy Evolving?

by: Roger Nusbaum

As our week-long conversation about efficient portfolio construction progresses, it could also be thought of as a discussion about lazy portfolios. Yesterday I got an email informing me that RBS came out with a Trendpilot ETN for gold, TBAR (IndexUniverse also had an article about it). This is the third fund in the line-up and I think there could be more coming. There is one for the S&P 500 (NYSEARCA:TRND) and one for the S&P 400 (NYSEARCA:TRNM). I wrote about TRND and TRNM for The Street if you want more details, but basically the ETN replicates long exposure to the underlying when the underlying is above its 200 DMA and replicates T-bills when the underlying is below its 200 DMA.

Before getting into strategy, these are notes issued by a bank that is 80% owned by the U.K. government and while I don't think the central bank has propped them up only to later allow them to fail, the facts of the issuer remain. Additionally, employing the 200 DMA strategy under the hood of the ETN is not plain vanilla, although it is plainer than if they were doing this in an ETF.

That out of the way, we have been talking for the last few days about very simplistic portfolios for people just starting out (the idea being you might be a person of influence on investing in your various social or professional circles) but we could also be talking about lazy portfolios too.

I've mentioned using the Schwab Large Cap ETF (NYSEARCA:SCHB) and the Schwab Small Cap ETF (NYSEARCA:SCHA) for certain accounts for being very cheap and because the commission is waived. In yesterday's post I posited that a portfolio consisting of SCHB, SCHA and the not-yet-listed Guggenheim ABC High Dividend ETF would allow for broad asset exposure along with the active decision of having avoided Europe and Japan. The fees for two of the funds (the Schwab ones) would be microscopic and there'd only be one $9 commission. This concept implemented as a lazy portfolio offers no defensive protection; the active plan of going defensive would make the portfolio un-lazy, so to speak.

Replacing SCHB with the large cap Trendpilot ETN would create a defensive strategy within the mix but still allow for "lazy" to prevail. The mix would still have U.S. large cap and U.S. small cap, along with (hopefully) broad exposure to Australia, Brazil and Canada. There would be two commissions to implement the portfolio, and the Trendpilot expense ratio is 100 basis points when it is long the underlying -- which is huge in the context of a low-fee portfolio. The last 10 years notwithstanding, this will be long the underlying for the vast majority of the time. Some big chunk of the portfolio going on defense (referring to the portion allocated to the Trendpilot) would go a long way to missing the full brunt of down a lot; not the full drawdown, just a chunk of it which could be a difference maker.

Obviously, I do not know if the Trendpilot is the answer. Clearly I am favorably disposed to the strategy, but the product is brand new and I think the innovation is, at the very least, helpful. We know the ETP industry will continue to innovate thus democratizing many concepts that have not been easily accessible to people before.

Felix Salmon has had a string of articles lately really questioning why any individual participates in the stock market; here is one of his latest. It is a worthwhile exploration, but the conclusion should not be "avoid the stock market" so much as: Maybe be skeptical of it, but figure out how to use it in such a way as to give yourself the best chance of getting what you want from it. To the extent this makes sense to you on some level, then your course of action will likely include strategic implementation of investment products.