Keeping It Simple In ETF Portfolios

Roger Nusbaum submits: I seem to have whipped up a hornet's nest with my post about an all ETF portfolio put together by Geoff Considine. My critique drew eight comments (half from Considine himself responding to various comments).

One comment I made was that no doubt Geoff could easily justify the issues I picked on, and he does justify them. The work is very academic and number-crunch intensive. The portfolio has about 1/4 of the assets in energy. No matter how much jargon anyone uses, if oil drops a lot, the portfolio the Geoff put forth will drop a lot.

I believe the complexity employed is unnecessary for most people. He relies on blending together different volatilities and standard deviations to weave together the portfolio. I don't think the volatility of one sector can be used to capture results from another sector and as I read Geoff's work this is in part what he is relying on. In my opinion, and based on my experience, too many things need to go right.

I fully respect the fact the Geoff might find my approach laughably simple. I build sector weights based on the S+P weight and then I assign what I think are fundamental reasons to whether those sectors are likely to do well or do poorly. I also look at many foreign countries and try to integrate some of them in with my sector work. This ultimately leads to stock/ETF/CEF selection.

That a positive environment for oil probably means good things for Norway, as an example, is hardly rocket science. Since there is no ETF or CEF for Norway that leaves just a few stocks to pick from. Not all themes are that simple but I 'd be delighted if they were. If I tried Geoff's approach, I would lose the forest for the trees.

Comments

[Roger Nusbaum]

kuruku-san has offered great comments throughout this debate, thank you. I don't think of myself as a closet indexer but I can't draw a line in the sand either. I can say I don't own MSFT, XOM, INTC, C or PFE for clients. Also my median cap size is around 35 billion so while I may be a closet indexer maybe these nuggets are reasons why I may not be??

I am a huge believer in things being proxies for other things. Learning and studying about this fascinates me. I am not willing to wager client money on ideas that strike me as being too academic, which is obviously very subjective. I think an oil stock can be a proxy for several countries but not other assets classes.