William Baldwin of Forbes looks at 27 super cheap ETFs -- 15 with equity exposure and 12 in bonds. You can read his article to get the details of the research work that he did but I thought it would be interesting to see how well these ETFs perform as a group.
Baldwin makes his selection based on those that have low expense ratios and have high liquidity so that trading friction will be low. It is an excellent idea to take out as much cost as possible, provided that the result portfolio is solid.
We compare it against our Simpler-Is-Better (SIB) portfolio which has one ETF for each of six asset classes.
|The list of minor asset classes covered by Forbes 2012 Low Cost ETF Plan||The list of minor asset classes covered by Six Core Asset ETFs|
|Commodities Precious Metals: (IAU) (SIVR), (SGOL) |
Diversified Emerging Mkts: (VWO)
Diversified Pacific/asia: (VPL)
Europe Stock: (VGK)
Foreign Large Blend: (VEU), (VEA), (VXUS)
Intermediate Government: (SCHR)
Intermediate-term Bond: (BND), (BIV)
Large Blend: (VTI), (VOO), (SCHB)
Long Government: (TLT), (TLH)
Long-term Bond: (BLV)
Mid-cap Blend: (VXF)
Muni National Long: (TFI)
Muni Short: (SHM), (SMB)
Short Government: (TUZ), (SCHO)
Short-term Bond: (BSV)
Small Blend: (VB)
Small Growth: (VBK)
|Commodities Broad Basket: (DBC) |
Diversified Emerging Mkts: (VWO)
Foreign Large Blend: (VEA)
Intermediate-term Bond: (BND)
Large Blend: (VTI)
Real Estate: (VNQ)
|Asset Class||Forbes 2012 Low Cost ETF Plan||Six Core Asset ETFs|
|Emerging Market Equity||2||1|
As of Apr 17, 2012, Forbes 2012 Low Cost ETF Plan investment choice is rated as above average and Six Core Asset ETFs investment choice is rated as average based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are. It has the following detailed ratings:
|Attribute||Forbes 2012 Low Cost ETF Plan||Six Core Asset ETFs|
|Diversification||average (62%)||above average (66%)|
|Fund Quality||great (85%)||average (59%)|
|Portfolio Building||above average (78%)||average (62%)|
|Overall Rating||above average (75%)||average (62%)|
The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA , both provided by MyPlanIQ). For comparison purpose, we also include the moderate model portfolios of a typical 6 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:
US Equity: SPY or VTI
Foreign Equity: EFA or VEU
REITs: IYR or VNQ or ICF
Emerging Market Equity: EEM or VWO
Fixed Income: AGG or BND
Performance chart (as of Apr 17, 2012)
Performance table (as of Apr 17, 2012)
|Portfolio Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Forbes 2012 Low Cost ETF Plan Tactical Asset Allocation Moderate||8%||68%||11%||82%||8%||58%|
|Forbes 2012 Low Cost ETF Plan Strategic Asset Allocation Moderate||-2%||-12%||14%||111%||6%||40%|
|Six Core Asset ETFs Tactical Asset Allocation Moderate||-3%||-36%||9%||75%||8%||59%|
|Six Core Asset ETFs Strategic Asset Allocation Moderate||2%||12%||15%||111%||4%||19%|
Currently Real Estate, US Equity and Global Real Estate are doing well. Only US Equity is available to Forbes 2012 Low Cost ETF Plan participants.
An ETF with an eye on expenses for the user doesn't guarantee that the ETF will deliver good results or even that they will play together well.
In this case, this is a good selection of ETFs that provide a diversified set of assets on which to build a strategy. It would be helped with the addition of a couple of real estate ETFs (VNQ, RWX) even if the expense ratios are a little higher.
Additional 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.