In a previous article, I reported on the performance of The ETF Monkey 2016 Model Portfolio through Q3. As outlined in that article, during Q3 the average implementation experienced a gain of 1.29%, bringing the average YTD gain to 7.53%.
In this article, I will examine how the portfolio performed both during Q4 as well for the full year.
The Big Picture
As readers who follow me are well aware, I set up three implementations of the basic portfolio, designed such that investors with accounts at Vanguard, Fidelity, and Charles Schwab could set up a version using ETFs which they could trade free of commissions.
For the 4th quarter, the average implementation experienced a loss of .09%. Vanguard, the only implementation that registered a gain, was the winner during this period, returning .32%. The Schwab implementation came in second with a loss of .21%, with Fidelity bringing up the rear with a loss of .39%.
For the full year, the average implementation experienced a gain of 7.43%. The Charles Schwab implementation is the winner over the full year with a gain of 7.62%. As a result of its (relatively) strong showing in Q4, Vanguard overtook Fidelity for 2nd place, with a gain of 7.47%. Fidelity, which ironically was the strongest out of the gate, winning Q1, ultimately ended up in last place, with a full-year gain of 7.20%.
To help you get a quick visual impression as to how the portfolio performed, here's a quick look at how the Vanguard implementation tracked against the S&P 500 index throughout the year (the blue line is Vanguard, the red line the S&P).
The two benchmarks I selected against which to evaluate the portfolio performed as follows:
- For the current period, the S&P 500 Index registered a solid gain of 3.25%. For the full year, this average is up 9.54%. This index closed at 2,238.83 on 12/30, the final trading day of 2016, vs. 2,168.27 on 9/30 and 2,043.94 on 12/31/15.
- For the current period, The ETF Monkey Vanguard Core Portfolio increased by 1.25%. For the full year, the portfolio registered a gain of 9.30%. This portfolio had a closing value of $ 52,845.86 vs. $52,191.69 on 9/30 and $48,348.37 on 12/31/15.
Both for the current period and the full year, I am disappointed to have to report that my 2016 model portfolio underperformed both the S&P 500 index and my comparatively simple Vanguard Core Portfolio by a fairly large margin. For the current period, with an average loss of .09%, the portfolio trailed the S&P index by a whopping 3.34% for the quarter and the Vanguard Core Portfolio by 1.34%. For the full year, with an average gain of 7.43%, the portfolio trailed the S&P 500 by 2.11% and the Vanguard Core Portfolio by 1.87%. I'll analyze and discuss reasons for all of this a little later in the article.
Before we get into a closer look at the three implementations themselves, here is one last big picture item; the dividends that were received in each implementation.
With that background, let's take a quick look at all three implementations of the portfolio as of the end of the year. I will first share the graphic, and then offer comments.
The weakest performer in the Vanguard implementation was the Vanguard Short-Term Inflation-Protected Securities ETF (NASDAQ:VTIP) as compared to its two competitors, the iShares TIPS Bond ETF (NYSEARCA:TIP) and the Schwab U.S. TIPS ETF (NYSEARCA:SCHP). As noted in the initial article on the setup of the Vanguard implementation, the average duration of this fund is 2.3 years as compared to roughly 8 years in its two competitors. However, interest rates continued to decline for most of 2016 before staging a rally in the last couple of months of the year. During Q4, VTIP quickly gained ground but not enough to fully offset the effects of the earlier part of the year.
Vanguard's strongest performer was the Vanguard High Dividend Yield ETF (NYSEARCA:VYM). Early in the year, the iShares Core High Dividend ETF (HDV) made some serious noise but, over the full year, VYM edged out both of its competitors.
As featured in the Vanguard overview above, HDV outperformed both of its competitors throughout most of the year. However, in Q4, it fell behind and, over the full year, was actually the worst of the three. The other notable weak spot in this implementation of the portfolio was the iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG). With a full-year return of 8.13%, it lagged its competitors by as much as 2.7%.
On the positive side, the iShares Core MSCI Europe ETF (NYSEARCA:IEUR) was the strongest performer in a weak asset class. While it lost 3.67% for the year, it beat the competitors from Fidelity and Schwab, and by quite a large margin in the case of Schwab.
As noted at the outset, despite slight outperformance by the Vanguard implementation in Q4, the Charles Schwab implementation hung on to take the winner's title over the full year!
As I line it up with both the Fidelity and Vanguard implementations, what jumps out at me is that it was the performance of the international components of this particular implementation that carried the day. Both the Schwab International Equity ETF (NYSEARCA:SCHF) and the Schwab Emerging Markets Equity ETF (NYSEARCA:SCHE) easily bested their competitors in both the Vanguard and Fidelity implementations. In fact, of the three, SCHF was the only international developed markets ETF to eke out a gain for the year. In doing a quick review of my initial setup articles, the biggest items I notice are that Canada is included in the Schwab offering and the China A-Shares are not.
Evaluating the Six Themes
Let's very briefly review the six themes on which I built the portfolio:
- The "New Neutral" - With the S&P 500 index registering solid 9.54% gain for the year, the market actually did a little better than perhaps this theme would have anticipated. In particular, the sharp rise of U.S. stocks following Donald Trump's election led to this result, with 3.25% of that amount coming in Q4.
- Better Opportunities Outside the U.S. - Overall, this theme proved to be a dud. With the exception of emerging markets, which I will touch on in point #4, blah. Just blah.
- Consider Europe - Simply put, this one should have been: "Avoid Europe at all costs."
- Measured Gamble on Emerging Markets - Through Q3, this asset class was the star of the portfolio! In the Q3 report, I even invoked the classic Jerry Lee Lewis song: "Goodness, gracious, great balls of fire!" And then in Q4, it all evaporated. As the U.S. market rocketed, emerging markets slumped. For the full year, this certainly was not a horrible theme. Far from it! At the same time, you would have done just as well in an S&P 500 index fund. We'll give this one a "neutral" rating, with the positive being that exposure to this asset class contributes to diversification.
- TIPS as Opposed to Bonds - This one turned out to be a winner, with respect to the fixed income portion of the portfolio. In all 3 implementations of the portfolio, TIPS outperformed bonds by as much as almost 3%.
- Include Some Exposure to REITS - Due to a sudden and sharp rise in interest rates following Trump's election, REITS absorbed a sound thrashing in Q4. However, with a price gain of roughly 3.5% together with solid dividends, this asset class still generated solid returns for the year, in addition to the benefits of diversification.
My 2016 Model Portfolio vs. My Vanguard Core Portfolio
As I candidly shared towards the outset of this article, my 2016 Model Portfolio has to be classified as a disappointment when compared against my simple 3-ETF Vanguard Core Portfolio, underperforming this benchmark by 1.87% during the course of 2016.
I just finished spending a couple of hours going through a careful analysis to determine the reasons for the shortfall. What I found was very interesting. It wasn't that the combination of ETFs I picked underperformed. Have a look at this graphic that I put together:
The green, peach and reddish colors represent asset classes; U.S. stocks, foreign stocks, and the bonds/TIPS/REITS combination. You will quickly notice that, overall, the combination of ETFs I picked for the Vanguard implementation of the 2016 Model Portfolio cumulatively beat their equivalents in the Vanguard Core Portfolio in two of the asset classes, and was only slightly behind in the third.
What, then, accounted for the shortfall. In a word, well, two words actually; asset allocation.
In themes #1 and 2, I anticipated what I described as "the new neutral" as well as the idea that there were better opportunities outside the U.S. This led to me only allocating 35% to U.S. stocks, a full 20% less than the 55.5% allocation in the Vanguard Core Portfolio. My international allocation was basically the same; 27.5% vs. 27%. Where did I put that extra 20%? Bonds, REITS and TIPS. You see, anticipating a rough year, I played it a little defensive.
As it turned out, U.S. stocks surged, and everything else was basically flat. And there, my friends, is your underperformance. I took a shot at outperforming the allocations in my Vanguard Core Portfolio and, at least for 2016, I underperformed instead.
Summary and Conclusion
Just a couple of things, in conclusion.
- This was a sobering exercise. As can be discerned from the article that introduced the portfolio, I spent a fair amount of time and effort reviewing those 2016 investment outlooks. And yet, the results of my simple 3-ETF Vanguard Core Portfolio were far better, at least over this period. Perhaps simple is better?
- The other takeaway is that, if you carefully select related ETFs from different families, such as Charles Schwab, Fidelity and Vanguard, your overall results will not be all that different. Over the course of the year, they traded places several times in terms of which one was the best-performing implementation.
I hope to return shortly with a full-year 2016 update on The ETF Monkey Retirement Portfolio. Considering the fact that this is a rather conservative portfolio designed for the investor of retirement age, I find myself extremely happy with its performance.
The Future of the ETF Monkey 2016 Model Portfolio
I have enjoyed setting up and tracking all 3 implementations of the portfolio. Further, while it underperformed in 2016, I feel like 2017 is shaping up to be a most interesting year and I am curious to see how the portfolio fares in this new environment.
At the same time, it takes a lot of time to track and report on 3 separate implementations. Therefore, moving forward, I am only going to track the Vanguard implementation, along with the retirement variant I set up. The reasons for selecting this implementation are as follows:
- As I write this, the article on the Vanguard implementation has generated roughly 3,700 page views over the past 12 months, the Fidelity implementation roughly 2,400 and the Schwab implementation roughly 1,200. This tells a pretty compelling story as to the relative interest level in each implementation.
- The ETFs in this implementation match most closely to the retirement variant, and this makes for a more accurate evaluation of the asset allocation choices.
Until next time, I wish you...
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Disclosure: I am/we are long HDV, TIP, 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.