ETFs Help Build Optimal Portfolios

Can we still get a good night’s sleep as prescribed in Sleep-Easy Investing (Viking Canada, 2008) yet earn a higher rate of return than set out in the book’s model portfolios? I believe the answer is yes, if we allow the use of equity-based exchange traded fund (ETF) such as the iShares S&P/TSX 60 Index Fund.

Let’s say someone has followed the book’s guidance and constructed a portfolio with low-volatility securities, including a balanced mutual fund (see previous post). For this portfolio, one can replace the balanced fund with a bond ETF and equity ETF, bought in proportions to achieve the same or similar bond/equity mix as the balanced fund.

Such an ETF combination should be able to replicate the same (or similar) level of risk. Yet it should be able to provide a higher rate of return than most balanced funds since the annual management expense ratios on the ETFs will be 1.5% to 2% lower.

Comments

[lazytrader:]

Using ETFs to achieve an easily optimised portfolio at low cost and risk is what we experiment with. Check out our Sharpe ratio optimized model portfolio. Get weekly updates on portfolio progress and rebalances as well as free newsletter notifications. An Ad-Free site.

2008 May 23 12:54 AM