The Master ETF

Matthew Hougan has an interesting idea:

What would your portfolio look like if you bought the five-largest ETFs on the market and weighted them based on assets under management?

• 51% U.S. Equities (41% SPY, 10% QQQQ)
• 39% Foreign Equities (25% EFA developed markets, 14% EEM emerging markets)
• 10% Gold (GLD)

The costs would be just 28 basis points per year (0.28%).

But why stop at five? If you extended it to ten, the proportion in US equities would go up substantially, and five seems a very arbitrary cut-off.

Instead, just keep on going. Take all of the listed ETFs, and weight them by AUM (assets under management). The result would be a much better indication of where people are really invested than a relatively narrow index like the S&P 500. There would be stocks and bonds, real estate and commodities, emerging markets and currencies - everything.

Obviously, this isn't something you could easily do at home with a Charles Schwab account. But if a financial institution offered a Master ETF along such lines, it could act as quite an attractive one-stop investment. Yes, it would suffer from the same problem that all cap-weighted indices have, of chasing bubbles - that's why gold is in the top five. But if you're OK with cap-weighted indices in general, then this could be a useful addition to the ETF space. The only problem, of course, is that if it took off, it would have to start buying shares in itself...

Comments

[Geoffrey Lordi]

Heisenberg Equity Principle, anyone? :)

[mikecupertino]

What I would like to see is a few ETF's that would let me "buy the market". Such a set of ETF's might include:

o Total US equities (including REIT's, energy, mining, minerals) holding 5-10K different securities
o Total world ex US equities (incl same asset classes as above) holding 10-20K different securities covering all countries with tradeable equities
o Total US fixed income
o Total world ex US fixed income
o Alternative assets (e. g. timber, commodities, private equity)

The only choice one would need to make in constructing a portfolio would be how to weight each of the above asset classes.

I realize there are already ETF's out there that come close, but they don't provide total coverage. For example, VTI doesn't include REIT's and other US asset classes.

If there were such ETF's or funds out there, I'd buy them.

Mikecupertino

[d_teller]

Fund inflow = momentum tracking = ETF trading (fee services). The mob determines the pricing, not the analysts or economics...for every JRCC there's a FSLR. For many years, over 6 mo. periods, the "darts" outperformed the "reasoned readers' picks" at the WSJ.

Perceptions sell (price) houses, autos, etc. Why shouldn't cap weighted ETF's fund flows be a current measure of the market's interest in risking investment dollars? I believe Mr. Hougan has captured the idea. The proportion of the holdings in the portfolio probably would change frequently.