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In a previous article we reviewed Morningstar's 401K plan and said that it was a model plan that would be worth cloning with ETFs. Currently the Morningstar plan uses a range of funds that are managed and not ETFs.

Over the next series of articles we are going to attempt to build an ETF clone and learn, step by step, where we can improve performance to end up with an elegant and high performance plan.

The first step is to simply replicate each of the funds in each asset class with an ETF equivalent. We use the commission free ETFs selected by Morningstar for TD Ameritrade. Once we have done that, we will measure the performance of the portfolio against the original.

Below is the fund list for each plan so that you can see how it was cloned. For those that are interested, it is possible to substitute other ETFs.

Asset Class	401K	Clone
COMMODITIES BROAD BASKET	PCRIX	DBC
DIVERSIFIED EMERGING MKTS	NEWFX	EWX
DIVERSIFIED EMERGING MKTS	ODVYX	VWO
Financial	FSLBX	XVF
Foreign Large Blend	VWILX	VEA
Foreign Large Value	TBGVX	EFV
High Yield Bond	PHIYX	JNK
Inflation-Protected Bond	PRRIX	TIP
Intermediate-Term Bond	PTTRX	AGG
LARGE BLEND	SLASX	VTI
LARGE BLEND	VINIX	IWV
LARGE BLEND	OAKMX	VIG
LARGE GROWTH	HACAX	MGK
LARGE GROWTH	CISIX	VUG
LARGE VALUE	RWMFX	VTV
Mid-Cap Growth	BRWIX	IWP
Mid-Cap Growth	POAGX	VOT
MID-CAP VALUE	VASVX	VOE
Moderate Allocation	VGSTX	AOM
Multisector Bond	LSBDX	GVI
REAL ESTATE	REFDX	VNQ
Cash	CASH	CASH
SHORT GOVERNMENT	STABLEVALUE	SHY
Short-Term Bond	VBISX	BSV
SMALL BLEND	OTCFX	VB
SMALL VALUE	PSVIX	VBR

We were able to map each class from the TDA plan with the exception of:

Financial

FSLBX

XVF

We used XVF which is the ETF we use to monitor the US Sectors.

Asset Class	401K	Clone
Balanced Fund	1	1
REITs	1	1
Fixed Income	6	6
Commodity	1	1
Sector Fund	1	1
Foreign Equity	2	2
Emerging Market Equity	2	2
US Equity	11	11
Other	1	1
Total	26	26

We remarked that this was an excellent selection in terms of quality and balance.

We now compare the rankings.

Rating Attribute	401K	Clone
Diversification	97%	97%
Fund Quality	63%	33%
Portfolio Building	95%	49%
Overall Rating	86%	58%

We note that the diversification is the same but the fund quality of the managed funds are higher than the ETF index funds showing selections with good managers.

As a result, the ability to combine the funds to create strong portfolios is also reduced and so there is a significant difference between the plan ratings.

Once we have established a baseline, we will start working on improving the fund quality to see if we can get closer to the original.

At the moment, we are expecting the performance of the clone not to meet the the original.

Portfolio Performance

Performance chart (as of Jan 28, 2011)

Performance table (as of Jan 28, 2011)

The returns are fair in an absolute sense even if we see this under-performing the original portfolio. We will expect to drive this up as we tune the fund selections.

We anticipate that with better fund selection, we will be able to drive up returns between 1-2% and we will see whether this turns out to be true.

When we use the TD Ameritrade plan with 101 commission free ETFs -- i.e. we give a wide choice for rotating funds, we are able to get much closer to the original plan.
 

Performance chart (as of Jan 28, 2011)

Performance table (as of Jan 28, 2011)

We have established an initial version of the clone with returns that are within striking distance of the original. We have shown that with a large selection of funds, we can meet the original in returns if not in elegance.

The next step is to start drilling down on individual ETF choices to see if we can drive the performance up.

Disclosure:

MyPlanIQ does not have any business relationship with the company or companies that provide the funds mentioned in this article. MyPlanIQ does not set up investment plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Disclosure: I am long DBC, DJP, IWO, IJR.