The ETF Monkey 2016 Model Portfolio: Vanguard Implementation

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Includes: BND, TIP, VEA, VGK, VNQ, VTI, VTIP, VWO, VYM
by: ETF Monkey

Summary

In a previous article, I introduced The ETF Monkey 2016 Model Portfolio.

This portfolio offers my suggested model for 2016 based on careful review of the 2016 outlook from multiple high-quality research firms and/or investment providers.

In that article, I also promised to build and then track practical implementations of the portfolio using ETFs from three different providers. This is the Vanguard implementation.

This article is designed to be read in conjunction with the article in which I introduced The ETF Monkey 2016 Model Portfolio. In that article, I offered what I believe to be a model portfolio for 2016, based on my reading and analysis of materials related to the 2016 outlook from several top-quality sources. I further explained that I would both build and track actual implementations of this portfolio using ETFs from three major providers: Vanguard, Fidelity (featuring iShares funds) and Charles Schwab. This article features the Vanguard implementation.

Overview

2016I will start with a couple of tables. The first will briefly recap the asset classes and weightings that I identified in The ETF Monkey 2016 Model Portfolio, followed by the name and symbol of the Vanguard ETF I selected to represent that portion of the portfolio.

The second will present a summary of key data for each ETF, including data points such as the expense ratio and average spread, the current dividend yield, and the size and daily volume of the fund. Combined, these will give you, in one glance, a big picture overview of the expenses and returns, as well as some idea of the fund's tradeability. In this fashion, when I have completed my articles for all three selected providers, you will be able to do some side-by-side comparisons if you wish.

Finally, one by one, I will offer other comments and data for each ETF.

So let's get started. Here is the first table, presenting my ETF selections.

Asset Class Weighting ETF Name Symbol
Domestic Stocks (General) 30.00% Vanguard Total Stock Market VTI
Domestic Stocks (High Dividend) 5.00% Vanguard High Dividend Yield VYM
Foreign Stocks - Developed 20.00% Vanguard FTSE Developed Markets VEA
Foreign Stocks - Emerging Markets 7.50% Vanguard FTSE Emerging Markets VWO
Foreign Stocks - Europe 5.00% Vanguard FTSE Europe VGK
TIPS 15.00% Vanguard Short-Term Inflation-Protected Securities VTIP
Bonds 10.00% Vanguard Total Bond Market BND
REITS 7.50% Vanguard REIT VNQ

Here is the second table, presenting key data points.

You will likely immediately notice the strength of Vanguard's offerings across all asset classes represented in the portfolio. With the exception of VTIP, every ETF has an inception date at least as far back as 2007 and Assets Under Management (AUM) of over $10 billion, in some cases much higher. Finally, you will notice that the expense ratio across all ETFs is as low as .05% and no higher than .15%, with 5 of the 8 coming in at or below .10%. In summary, these are long-standing, low-expense ETFs with tremendous size and trading volume, representing great liquidity. This can be important during times of market volatility.

Note: In view of Vanguard's standing in the ETF field, I will use this article as the lead, or reference, article for the three implementations. I will in some cases refer back to, and compare, the related Vanguard ETF when discussing the selections I make for the Fidelity and Charles Schwab implementations of the portfolio.

With that overview in mind, let's now take a look at each of the ETFs.

Vanguard Total Stock Market

I have already written an in-depth article on this ETF for Seeking Alpha, in preparation for including it in The ETF Monkey Vanguard Core Portfolio. Feel free to consider that article if you wish.

VTI tracks essentially the entire investable U.S. market in a single ETF. It does so by tracking the CRSP U.S. Total Market Index. As opposed to the S&P 500, which is comprised solely of large companies (large-cap), the landscape covered by VTI also encompasses many smaller companies (mid-cap, small-cap, and even micro-cap). Such companies, while offering a higher level of risk than their larger brethren, also offer greater opportunities for growth.

At .05%, VTI still carries one of the lowest expense ratios in the ETF marketplace. While the competitors I will feature from both iShares and Charles Schwab now offer an even lower .03% expense ratio, I suspect Vanguard is standing pat for now because they offer market-leading expense ratios across a wider variety of ETFs than their competitors.

As of 11/30/15, VTI contains 3,791 stocks, with its Top 10 holdings comprising 15.1% of the total. As such, this ETF provides about as solid a foundation as you could hope for when developing your domestic stock allocation.

Vanguard High Dividend Yield

I have also covered this ETF in depth in a recent article. As it happens, in terms of page views this is the most popular article I have ever managed to write for Seeking Alpha.

VYM tracks the FTSE High Dividend Yield Index, which represents the U.S.-only component of the FTSE All-World High Dividend Yield Index. This index is comprised of stocks characterized by higher than average dividend yields. It does not include REITS, and also eliminates stocks forecast to pay zero dividends over the next 12 months. It contains 435 stocks, with its Top 10 entities comprising 31.3% of the total.

VYM has substantial weightings in sectors such as financials, oil & gas, telecommunications and utilities. This holding is designed to help increase the level of income generated by the portfolio. Its 3.10% yield will act as a nice supplement to the 1.93% yield offered by VTI, while VTI should offer more opportunities for growth.

Vanguard FTSE Developed Markets

I briefly covered this ETF as well as VWO, the ETF discussed in the next section, in this article.

In The ETF Monkey Vanguard Core Portfolio, I use the Vanguard FTSE All-World ex-US ETF (NYSEARCA:VEU) as my ETF of choice. This is an excellent vehicle if one wishes to obtain 'comprehensive' exposure to foreign stocks, including both developed and emerging markets. At the same time, your relative exposure is decided for you, 17.30% in emerging markets as of 11/30/15.

In contrast, for The ETF Monkey 2016 Model Portfolio, I am electing to use a combination of VEA and VWO, which allows us to determine our desired allocation between developed and emerging markets. One interesting note is that Vanguard is in the process of enhancing VEA, switching to an underlying index, which includes Canada, whereas the previous index VEA tracked did not.

This ETF currently contains 1,866 holdings, with the Top 10 comprising 11.3% of its assets. It also sports a wonderful .09% expense ratio, stellar for an ETF, which provides international exposure.

Vanguard FTSE Emerging Markets

As alluded to in the section above, this is the counterpart to VEA.

This ETF invests in stocks of companies located in emerging markets around the world, such as China, Brazil, Taiwan, and South Africa. Its goal is to closely track the return of the FTSE Emerging Markets All Cap China A Transition Index. The "transition" basically refers to the fact that, as Vanguard words it, the ETF "over time will build exposure to small-capitalization stocks and China A-shares." However, they are doing so in a manner, which will minimize the transaction costs associated with this endeavor.

This ETF currently contains 3,106 holdings, with the Top 10 comprising 18.2% of its assets. It carries an expense ratio of .15%, once again impressive for an ETF, which provides exposure to emerging markets, with all associated trading costs.

Vanguard FTSE Europe

This ETF seeks to track the performance of the FTSE Developed Europe All Cap Index, which measures the investment return of stocks issued by companies located in the major markets of Europe.

A full 72.5% of the fund's assets are comprised of companies in the United Kingdom, France, Germany, and Switzerland. This ETF currently contains 1,238 holdings, with the Top 10 comprising 16.0% of its assets.

As mentioned in the article in which I introduced The ETF Monkey 2016 Core Portfolio, my goal was to slightly increase the overall weighting, or effect, of Europe in the portfolio. In that vein, if you were to compare the two, you would see that 8 of the Top 10 companies in VGK are also in VEA, with two companies from Japan breaking the Top 10 in VEA.

As noted above, this ETF carries an expense ratio of .12%.

Vanguard Short-Term Inflation-Protected Securities

This ETF seeks to track an index that measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years.

As opposed to the iShares TIPS Bond ETF (TIP), which I will feature in the Fidelity variant of the portfolio, this ETF keeps the maturity shorter. All TIPS have a maturity of 5 years or less, with the average duration being 2.3 years (as opposed to 8.44 years for TIP).

As a result, VTIP can be expected to have less real interest rate risk, but also lower total returns relative to a longer-duration TIPS fund, such as TIP.

Vanguard Total Bond Market

I have already written an in-depth article on this ETF for Seeking Alpha, in preparation for including it in The ETF Monkey Vanguard Core Portfolio. Feel free to consider that article if you wish.

This is a great ETF for achieving across-the-board domestic bond exposure in a single source. It contains both government and corporate bonds and maintains a moderate risk profile. It does not include bonds with a credit rating lower than Baa and has an average duration of 5.8 years.

As you may be aware, concern has recently been expressed as to the safety and liquidity of bond ETFs. This article concerning a recent major default may be of interest. It features the fact that the default involved a mutual fund, not an ETF, and also that the fund invested in highly speculative and somewhat illiquid junk bonds. In contrast, BND contains 7,746 different bonds, 63.5% of its assets are in U.S. Government bonds, and no bonds rated lower than Baa are included, as noted above. Put otherwise, this is not a speculative vehicle.

Vanguard REIT

I briefly covered this ETF, along with two competitors, in this article.

VNQ is often described as sort of the pre-eminent player in the field, the "big daddy" if you will. With an inception date of 9/23/04, 154 REITs in the portfolio, $27.39 billion in Assets Under Management (AUM), a low .12% expense ratio, and great daily trading volume leading to a wonderful average price spread of .01%, there are many reasons this ETF has been described using terms such as "the king" and "top of the charts."

This ETF tracks the MSCI US REIT Index. The Top 10 holdings comprise 35.9% of its assets, with Simon Property Group (NYSE:SPG), its single largest holding, carrying a 7.9% weighting.

Summary and Conclusion

So there you have them. The 8 ETFS that make up the Vanguard implementation of my portfolio. I plan to follow up with similar articles for both Fidelity and Charles Schwab, and finally with an article that will begin the process of actually building and tracking the portfolios as of the closing price of all the components on December 31, 2015.

Until then, I wish you...

Happy investing!

Disclosure: I am/we are long BND, VEU, VNQ, VTI, VWO, VYM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult with their personal tax or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.

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