XTF Group

All-ETF Portfolios vs. Strategic Mix of Stocks

It is our view that a properly allocated portfolio of ETFs can have a better return on investment than a portfolio of individual stocks. Moreover, even a single broad-based ETF generally is a better strategy than a portfolio of individual stocks.

The out-performance results shown in the above article are a good example of “data mining” – plugging in past performance and volatility of individual stocks to predict future performance. Numerous studies have shown that this is not a repeatable process.

Also, the C, BA and EXC stocks mentioned in the stock portfolio are included in the Total Market Index, and as such do not add diversification. Again, this study appears to be a statistical data mining exercise, where components are specifically selected based on past-performance to demonstrate out-performance of the market.

We see little justification for the ETF asset-allocation shown here. It is our belief that simply adding utilities and basic materials to a portfolio does not necessarily add diversification. These sectors are already included in the Total Market Index; adding them simply results in over-weighting these sectors.

Additionally, the study does confirm the fact that there are asset allocation models whose performance can be matched by a few individual stocks. It is essential that an optimal asset allocation model is in place to form any portfolio. ETFs may offer the best available option for efficient asset allocation without negative-alpha risk and with low expenses.