A Model ETF Portfolio -- But Whose Model? (ETFs: IVW, IVE, IWP, IWS, IWO, IWN, EFA)

Roger Nusbaum (wish list) submits: A good friend of mine works in the investment services division at one of the big domestic banks. He faxed me a printout of the bank's model ETF portfolio. I plugged it into Morningstar to help me look under the hood.

Here are the components and weighting of the all equity version, all of the funds are from iShares:

• S+P 500 Barra Growth IVW 32%
• S+P 500 Barra Value IVE 32%
• Russell Midcap Growth IWP 7%
• Russell Midcap Value IWS 7%
• Russell 2000 Growth IWO 3%
• Russell 2000 Value IWN 4%
• MSCI EAFE EFA 13%
• Cash 2%

On surface it seems reasonably diversified for cap size and it has some foreign exposure. After plugging it in to Morningstar it actually looks a lot like the S+P 500. In comparing the ten S+P sectors of SPX to the portfolio, eight of the ten are within 1% of the SPX weight.

So the portfolio makes no effort to add value with sector weightings. The bank's strategist is on CNBC all time talking about sector weighting so the portfolio does not leverage off of this part of the bank's work.

I believe another flaw is only using EFA for foreign exposure. More than 40% of the fund is western Europe. I have written a few times my belief about the correlation between economic and stock market cycles of Europe and the US growing tighter. If this holds water that should mean the products like EFA will not offer as much diversification as in the past.

The last point to make, and I mention this all the time about ETFs, is that the portfolio yields 1.69% which is a little less than the market. In a flat market I think it makes sense to overweight dividends.

To sum I think a lot of people could come up with the same thing on their own and with just a little bit of effort capture a little more yield and diversification.

Related:

• ETFs mentioned in this article (clicking on a link pulls up articles for the ETF in question): EFA, IVE, IWN, IWO, IWP, and IWS.
• Other articles on the Seeking Alpha Network by Roger Nusbaum.

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