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We have already examined the Morningstar 401K plan. We explained why it is a model of plan creation – providing a manageable number of funds with broad asset class exposure that enables portfolios that can deliver solid returns. We also provided an ETF clone which enabled portfolios that underperformed the original.

Performance chart (as of Feb 25, 2011)

click to enlarge

Performance table (as of Feb 25, 2011)

The chart is a little misleading as the ETF Clone has fewer choices until recently because of the newness of the ETF funds. If we look at the table and consider just the five year return figures we can see that the strategic asset allocation returns are similar but there is an additional 3% garnered from the original.

This has prompted further analysis of the funds which we present here.
We tracked returns for all of the funds used in each portfolio over 5, 3 and 1 years. Some of the ETFs are sufficiently new that there wasn’t five year data. We then created a score which was the summation of the five year number multiplied by three, the three year number multiplied by 1.5 and the one year number.

Name

5 year AR (%)

3 year AR (%)

1 year AR (%)

ETF Score

Mutual Fund Score

DBC
PowerShares DB Commodity Index Tracking
5.97
(4.76)
20.50
31%
PCRIX
PIMCO Commodity Real Ret Strat Instl
2.32
(8.45)
20.85
15%
EWX
SPDR S&P Emerging Markets Small Cap
8.69
(0.04)
18.93
45%
NEWFX
American Funds New World A
8.29
(0.21)
17.00
42%
ODVYX
Oppenheimer Developing Markets Y
(2.86)
(7.95)
25.22
5%
VWO
Vanguard Emerging Markets Stock ETF
17.45
17%
JNK
SPDR Barclays Capital High Yield Bond
4.15
6.89
11.89
35%
PHIYX
PIMCO High Yield Instl
5.51
6.10
7.11
33%
PRRIX
PIMCO Real Return Instl
5.40
4.34
5.44
28%
TIP
iShares Barclays TIPS Bond
4.10
2.46
4.06
20%
AGG
iShares Barclays Aggregate Bond
5.28
5.05
3.76
27%
PTTRX
PIMCO Total Return Instl
8.07
8.64
6.61
44%
GVI
iShares Barclays Interm Govt/Credit Bond
3.12
2.53
7%
LSBDX
Loomis Sayles Bond Instl
6.35
4.82
8.32
35%
PRWBX
STABLEVALUE
3.96
3.07
(0.21)
16%
SHY
iShares Barclays 1-3 Year Treasury Bond
3.65
1.99
1.07
15%
BSV
Vanguard Short-Term Bond ETF
1.08
0.90
3%
VBISX
Vanguard Short-Term Bond Index Inv
4.36
2.87
0.10
17%
VEA
Vanguard Europe Pacific ETF
(2.68)
17.45
13%
VWILX
Vanguard International Growth Adm
4.04
(1.26)
21.65
32%
EFV
iShares MSCI EAFE Value Index
(0.66)
(4.69)
12.77
4%
TBGVX
TweedyBrowne Global Value
2.87
1.38
13.75
24%
REFDX
Morgan Stanley Real Estate I
2.55
2.13
34.01
45%
VNQ
Vanguard REIT Index ETF
2.09
2.26
33.32
43%
FSLBX
Fidelity Select Brokerage & Invmt Mgmt
(1.09)
(1.28)
15.23
10%
XLF
Financial Select Sector SPDR
(10.63)
(12.91)
15.61
-36%
IWV
iShares Russell 3000 Index
1.91
1.28
21.97
30%
OAKMX
Oakmark I
4.75
5.85
17.86
41%
SLASX
Selected American Shares S
1.35
(1.68)
15.91
17%
VIG
Vanguard Dividend Appreciation ETF
3.37
18.54
24%
VINIX
Vanguard Institutional Index Instl
2.11
0.16
19.63
26%
VTI
Vanguard Total Stock Market ETF
2.57
1.55
23.38
33%
CISIX
Calvert Social Index I
1.71
1.66
23.25
31%
HACAX
Harbor Capital Appreciation Instl
3.15
4.35
20.33
36%
MGK
Vanguard Mega Cap 300 Gr Index ETF
3.25
23.65
29%
VUG
Vanguard Growth ETF
3.25
2.33
22.48
36%
RWMFX
American Funds Washington Mutual R5
1.68
(1.10)
16.74
20%
VTV
Vanguard Value ETF
2.03
(0.60)
19.16
24%
BRWIX
Brandywine
1.16
(3.55)
36.42
35%
IWP
iShares Russell Midcap Growth Index
4.55
5.27
38.04
60%
POAGX
PRIMECAP Odyssey Aggressive Growth
6.64
9.56
18.72
53%
VOT
Vanguard Mid-Cap Growth ETF
3.45
36.71
42%
VASVX
Vanguard Selected Value Inv
4.65
4.17
23.07
43%
VOE
Vanguard Mid-Cap Value ETF
3.77
23.68
29%
AOM
iShares S&P Moderate Allocation
9.73
10%
VGSTX
Vanguard STAR Inv
3.61
2.57
12.85
28%
OTCFX
T. Rowe Price Small-Cap Stock
5.52
10.67
38.04
71%
VB
Vanguard Small Cap ETF
4.14
6.49
31.92
54%
PSVIX
Allianz NFJ Small Cap Value Instl
6.67
5.67
28.03
57%
VBR
Vanguard Small Cap Value ETF
2.50
4.42
25.69
40%
Instead of looking at each fund individually, we added the scores in each of the major asset classes together:
Asset Class
ETF Score
Mutual Fund Score
MF/ETF
Delta
US Equities
4.20
4.22
0%
International Equities
0.17
0.56
228%
Emerging Markets
0.62
0.46
-26%
Real Estate
0.43
0.45
4%
Commodities
0.31
0.15
-52%
Fixed Income
1.07
1.73
62%
This gives us some insight on the different portfolios.
  • US equity returns are running neck and neck – indicating that to improve the returns of the ETF portfolio, looking at the US equities should only be undertaken when the other asset classes have been examined
  • There is a significant gap in the international equities. The Vanguard Europe Pacific ETF looks like it will help but this is an area for shoring up the ETF portfolio
  • The Emerging Market ETF outperforms the original so, while it may be better to improve performance, that is a secondary task
  • Real estate runs neck and neck so look at that later
  • Commodities, the ETFs are running ahead so, again, we can look at that later
  • Fixed income is probably the biggest area where the difference is explained. It is the largest single asset category in terms of funds invested (in most cases) and there is a significant difference between the two. The original plan has two of the leading managed fixed income funds which shows consistently higher performance.

The takeaway is that to look to improve returns from the Clone ETF, focus needs to be applied on international and fixed income asset classes. As we go through this exercise, this will bring to the fore an elephant in the ETF space – are there times when managed funds do outperform indexed funds? Intuitively it would seem so and fixed income in this market seems to present itself as a prime example.

We will examine this deeper in an upcoming article.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Disclosure: Author is long DBC, IJR and IWO.