Casey Smith

Investment advisor, etf investing
Casey Smith
Investment advisor, ETF investing
Contributor since: 2008
Company: Wiser Wealth Management, Inc
2% is outrageous! Unfortunately most are paying 2.5% and don't even know it.
There is some confusion as to what fee only is. There are three standards as set by the regulatory authorities. Commission based, Fee Based and Fee Only. A commission broker is fairly obvious to spot, but Fee Based and Fee Only often get confused. A Fee Based advisor can sell you funds at a commission but also work for you as a percent of managed assets. In this relationship the advisor is probably getting paid as a percent of assets managed while getting commission on insurance products. In a Fee Based relationship transparency is very important as all the fees can be confusing and add up quickly.
Fee Only will always get paid by the client directly and never by the product. The fiduciary standard is aways in play. Insurance products (annuities) are vary rarely used.
According to Dave's investment philosophy found on his website, he does not support fee only advisors. Possibly Fee Based, as they could sell those expensive A share funds he loves do much.
Many objections to not paying off the home are based on if I use part of my nest egg to pay off the home then there would be less money working for me. The assumption there that the money is not spent down. In this example based on the clients requirement to protect principal I am showing that it is not worth taking the risk of such a high rate of needed return vs being free of the mortgage payment. I would hope with $1,100 less to generate monthly the overall nest egg would have to generate a rate of return that is less than 8.8%.
In the iShares asset allocation ETF (AOA, AOK etc) there are no fees for the underlying ETFs because iShares waives them in those particular funds, so for example in AOK, you only incur the 30bps expense ratio. This makes the funds very compelling for the reasons stated above.
Qniform, The cost of owning these portfolio's is 0.30% a year. At TD Ameritrade these funds trade at no transaction costs. If you are saving on a monthly basis it does not get much cheaper than this. For every dollar you put in, 100% gets invested into a risk managed allocation that automatically rebalances at relatively low management fee compared to mutual funds that charge 5.25% just to deposit money. I also like these funds where the account balance is less than 20K for the same reasons. You can replicate these funds at other custodians using their no transaction ETFs, but you will have to do the allocation and rebalancing yourself.
1% for an ETF would be very expensive. You can hold the S&P 500 for less than 0.10%. Much less than paying to purchase 500 stocks or even 100. Many people transitioning to ETFs are moving from poorly managed Mutual funds where a .25% access to the broad or sector of the market is ultra cheap. Passively or actively picking stocks or ETFs has been covered exhaustively and can be found by searching this site.
SPLV has a higher dividend yield and those who want to overweight in utilities and consumer defensive stocks would like this ETF. Of you are ranking based solely on diversification then yes you are correct.
Similar objectives but two different aninmals. ETFs are similar to mutual funds in that you just can go by the name, you have to look at the methodology. The biggest difference in that Mutual funds disclose their holdings quarterly; ETFs, daily.
I understand there is more to standard deviation than the broad generalization that I was giving it. For those interested the details can be found here
Correct. For the conversation of currency it is out.
Yes.. Thank you for pointing that out. IEV and VGK are interchangeable. VPL is the green circle.
IVV, IJR, IJH, EFA, DWM, DEM, DJP, SCZ, BND, STPZ or TIP, MINT, AOA, AOR, AOM, AOK would be good starts.
It is the only ETF of its kind, so someone searching out this allocation can only go here. Invesco could also be using it in other funds.... Unfortunately we can't see who the largest owners are like we can with Mutual Funds, but I suspect that it is institutional ownership vs in private client accounts.
I should note that PSP tracks the S&P Financial index much better than the 500 index. Here is PSP's data.
I am not a regular follower of PSP, but looking at its allocation 76% in financials and with 27% of holdings in the US, this would explain a lot of tis performance considering the last year in Europe. It is interesting that 14% of the countries within the ETF are considered unclassified, 16% are in an unclassified cap size. This is directly off the PowerShares website. Some of its holdings invest in companies that lend to privately held companies.... not a pure play on private equity. Getting a loan repaid versus owning private stock are two very different expectations.
There is not an ETF than captures private equity very well .... Well technically I guess Index IQ replicates it with their hedge replication. There was an ETN but it went out of business in 08. PowerShares offers an ETF but it is global and down 18% over the last year and lags the S&P 500 by 15% since inception.
Private equity is messy and once our project is complete I will probably not venture back in. There is a lot of research involved and in the end you still have to be very comfortable with the managers of the project. There is a great opportunity for Ponzi Schemes in private equity. Physical visits to the site and constant cross checking the books is requires in my opinion.
We have learned a lot about risk in the last 5 years. The last 5 years has forced the rewriting of many financial textbooks. Our strategy is not sexy, will not make you rich overnight or win our firm any portfolio of the year awards but it works. We manage risk.... Much like a pension fund would do. With the average age at our firm being 68, we need yield and downside protection. This approach made 2008/9 full recoverable less than a year later. Of course during it.... CNBC says buy and hold is dead, the sky is falling etc..... Even Jim Cramer said one night the best thing for a long term investor to do is buy and hold ETFs! January or February of 09 I believe. I am sure the tape was erased :)
Target date funds look nothing like the portfolio's that we manage. ETFs allow for much more far reaching asset classes in custom portfolios vs. a target date fund which was designed to keep plan sponsors from getting sued by plan participants.
As I mention in the interview, we do not like REITs on a national level at this point. They will eventually get worked back in. Instead real estate through private equity is our choice for this play. We find that certain markets are very uncorrelated with equities. Unfortunately not every client will qualify for private equity, thus it does not show up in the models.
Commodities are in all of our portfolios. Historically when we increase the percentages, risk increases and rate of return remains the same.
The political commentary was for our business owners/clients and fellow aviators that 100% agree with me. You have the freedom to skip that part just like I have the freedom to not listen to NPR.
There are some great relatively newly launched dividend ETF products out there. SPLV, HDV, VIG, and the WisdomTree Dividend focused ETFs are some examples. In this low yield environment I would mix these in with the traditional IVV, IJH and IJR ETFs. A sample income growth portfolio could look like this with a yield of 3.8%:
8% Large Cap US
4% Mid Cap US
3% Small Cap US
8% Foreign Developed Markets
3% Emerging Markets
3% Commodities
8% Emerging Market Debt
28% US Treasuries and AAA Rated Bonds
10% TIPS
3% International Treasuries
8% US High yield Bonds
4% Preferred Stock
3% Short Term Corporate Debt (3 months)
7% Cash
If you are more conservative you can reduce the equity exposure from 30% to 18% and reallocate the difference within the bonds. Of course I recommend working with a fee only advisor or planner to put together an optional portfolio. If you do not want to pay an asset under management fee you can usually find one that will work at an hourly rate to help you build a portfolio.
I agree, I repeat myself all the time! I keep saying "buying high in 07 in greed and selling 08/09 out of fear is not an investment strategy that we recommend. The end result is you broke and your commission broker richer." I will keep kindly repeating it until everyone gets it. The "pie slicing" approach as you call it has beat 99.4% of mutual fund managers since 1975 (University of Maryland Study adjusted for risk). Investor behavior is just important as the strategy.
The US credit downgrade essentially meant nothing to investors. The world continues to flock to US debt. If the US is not the safety net of the world, who or what will be? This is a question that I can not currently answer. I believe that we are ok as investors for another 10 - 15 years pending no one or any event kicks the wheels out from under our wagon. How US corporations trade with the US debt in pearl is speculation at this point. If Europe is the model then US equity would be down considerably but not as much as treasuries in that situation. There is no doubt that the fall of America would be hard. As I tell our clients, fear is not an investment strategy. looking for long term healthy asset classes is, but what if there aren't any? To answer your question directly, government waste and overspending has a good head start as America has made decisions that will be very hard to reverse. How we invest in this environment.... I am still processing this. I hope that capitalism makes a come back and overcomes this whiney undertone of entitlements.
ETFSuperfreak... I love the call sign!
A long term investor does not want to slant a portfolio towards growth or value as both run in cycles. Over a long time frame you just need core/blend holdings to track the market. Morningstar has some great research and graphs showing this. Certainly value is currently preferred over growth at this point, but when will that change? I don't care to make that bet, as what if I am to early or late. I will hold both in a portfolio. However for conservative and income seekers there is a yield problem in the bond market. All the safe bets have yields less than 1.9%, but the cost of living seems to be climbing at a faster rate. To make matters worse there is a lot of risk going to far out on the yield curve with interest rates so low. This is where value ETFs can come into play. We simply reduced our holdings in core ETFs such as IVV and added SPLV, HDV and or VIG to the portfolio's to boost yield and keep risk the same. I recently talked about this at an S&P event in Atlanta as well as a S&P webinar for advisors early last year. With the exception of VIG, SPLV and HDV are value plays. They advertise themselves as low volatility and high dividend yield. For moderate risk takers and higher, we stick to the core holdings.
The 1% fee for the fund when tracking the S&P 500 vs. what annuities is cheap comparatively. In my world of fee only fiduciary financial advice, most advisors would balk at TRND as being expensive compared to their 10bps index funds. You are correct, TRND is similar to the same risk as holding more than 250K at the bank. However at the bank you may have a place in the front of the line to get that money back.... With the ETN you are dead last.
You could own both. It would average out to a lower expense ratio and you could control more of what you have allocated to grow vs. value within the asset class. It should be noted that the expense ratio has been more than made up for in dividend yield.
PID will buy International companies locally through ADR's and US listed non US companies. VIG is purchasing 140+ US based companies only. PID holds 77 companies weighted by dividend yield but then screened, only including companies that have increased dividends over the last 5 years. Its standard deviation over the last 5 years is 23% vs, 21% of the MSCI EAFE index. 50% of the fund is in 3 countries UK, Canada and Mexico. This might be a good satellite holding, but I would not use it as your core international holding for diversification reasons. For example EFA hold 950 companies. My 2 cents :)
GTAA's active strategy would not show up in our passive models, but in the context that I wrote about with TRND then it certainly is interesting. It will be interesting to see if TRND catches on. In Europe it has over a billion in assets. GTAA is a similar concept but with global diversification. It also could be used in the place of annuities making the 1.35% fee reasonable, but to a passive long term investor that just seems so expensive! The historical data looks good, other than in the 90's..
Wow! I think Apple has it right on. It appears that they are indexers. I think the Plan IQ is giving a low fund quality rating because of the index funds. Morningstar does the same thing due to the index falling in the middle quartile. Over the long haul low fees and proper asset allocation will beat active management. The University of Maryland's study on fund managers long term Alpha shows supports my statement. From 1975 to 2007, only .06% of fund managers beat their assigned index after fees. Morningstar also has data supporting the same think. Their report comes out quarterly.
Thank you for all your responses and questions. This project has been fun.
The Weinman article was posted on May 7th when EMB was trading at 98.18 and closed Friday at 111.57. This is a 13% move upward since a call of a bubble. I will say that after reading the article I think he was simply pointing out some short term issues and not really screaming "get out.” I did get a little confused at the end in comparing EMB to other bond funds in totally different risk categories. Chasing yields has its own risk. This is why I do not participate in market timing but rather look for long term healthy asset classes to buy and hold.
We initially added EMB to our client’s portfolios just over 2 years ago. Any new money is dollar cost averaged in over time, especially for new accounts. I will refrain from calling a bubble here but with the mess in Europe and the US second guessing capitalism, as we have known it, Emerging Market Debt may have further to climb especially as more institutional money moves in. Of course when it fall’s it will be the ETFs fault (sarcasm!)
Looking at the raw JP Morgan Emerging Market Index data, the bottom line is emerging market bonds have outpaced the S&P 500 since 1989 (raw data available from JP Morgan & maybe Morningstar). Yield is great, but the total return cannot be ignored either.
Emerging markets held in US Currency gives some stability to the investment. This is a feature of EMB that we like, as it pushes the currency volatility risk to the issuing country. When the total return is largely coming from cash flows, keeping currency volatility down is key. We have other ways to hedge a falling US Dollar and the US currency risk within our portfolios. For Emerging Markets we simply chose the more stable currency.
We look at asset classes as distinct investments and don't compare investments across asset classes for certain features like income or dividends. Even in emerging markets, it so important to really analyze what you’re investing in. For instance, the emerging market ETFs are issued in US Dollar by emerging market governments, while emerging market stock ETFs represent company and currency risks. We would even consider small cap emerging market stock ETFs as a different asset class. We don't use small cap emerging stock ETFs and don't use ETFs in the large cap emerging market space that focus specifically on income. This is just because we can focus on income in other areas and access the full growth potential of emerging market stock. ETFs like EMB give access to an incredible unique asset class that has a low correlation to US stocks and bonds.
Price does matter. EMB has an expense ratio .60%. For us, using ETFs makes sense as a way to invest and the cost is relatively low especially in the emerging market categories. We feel like that's what using index products is all about. The other emerging market debt products have somewhat similar expense ratios. To us, it's important to keep in mind that these ETFs have different features, meaning these ETFs are not like comparing IVV and SPY. As already mentioned, EMB has an expense ratio of 0.60%, the PowerShares product, PCY, charges .50% and the Market Vectors Emerging Markets Local Currency Bond ETF, ELMC, has a .49% expense ratio, and the newest ETF, the WisdomTree Emerging Markets Local Debt Fund, ELD, charges, .55%.
I find it very humorous how so many active investment professionals are threatened by buy an hold indexing. I guess they have to justify their outrageous fees and their egos. After all it is our human nature to think that we are winners and thus we can defeat anything, including the S&P 500. It is not normal to say "no I can't meet that objective." People that walk down the street feeling defeated are put on medication and told that they really are winners!
Indexing does not make you average but simply allows for access to global asset classes at expenses usually less than 25 bps without the mistakes of a fund manager only concerned about quarterly Morningstar rankings. Are there good asset managers? YES. Do active managers also use ETFs? YES. However I will point to a University of Maryland study that shows that only 0.6% of fund managers beat their assigned index from 1975 through 2007. Where are the best managers? Hedge funds with 5M minimums. 2008 was great for indexers, 2009 was great for active management, 2010? From now until 2025? I will bet it will be hands down indexers with a global approach to diversification. It is no longer just about large, mid, small, bonds and international for diversification. 2008 tossed that out the window, if there were any believers left. Diversification is so much more than that basic college portfolio management class that we all took. Buying and holding stock, basic asset classes and your first job is dead. The latter two get discussed all the time, but with over 900 ETFs in asset classes that use to be only available to the extremely wealthy; buy and hold is very viable and competitive. That is what our 3 year 100% client retention rate, our new AUM annual growth rate and successfully navigating through 2008 is telling our firm and so many other professionals that have come downstream to pure filtered non polluted water.
AlanCelt's posting that this is a miss leading article made me dig a little deeper into the rate of returns and where Mr. Stewart got his data. As posted above he mentioned that his data came from the Federal Reserve. In addition to that information I found that S&P 500 pr (price Return) began on 2/29/1928.
Using DOW numbers as AlanCelt did to explain the performance of the S&P does not make a lost of sense to me. I like the sprit of the challenge in that we should never take things a face value. That’s like picking a President based on campaign ads!
Thanks AlanCelt for keeping me honest! And Morningstar for the data!
Data from the Wall Street Journal article was from the Federal Reserve and should have taken into account dividends.
The numbers above are through September's month end 2008. Yes! it's that volatile.