Lazy Portfolio of VEU and IWV Doesn't Cover All the Bases

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Includes: EFA, IWV, VEU
by: Roger Nusbaum

A reader left a comment professing a lack of comfort with country selection and wonders about the following lazy portfolio:

  • 55% Vanguard FTSE All World Ex-US (NYSEARCA:VEU)
  • 45% iShares Russell 3000 Index Fund (NYSEARCA:IWV)

The chart compares both funds with the S&P 500 since VEU's inception.

In its short life VEU, the foreign fund, has had a 0.876 correlation to the S&P 500. In the same time period (but less surprising) IWV has had a 0.975 correlation to the S&P 500.

Further, VEU and IWV have had 0.863 correlation to each other. This is something I have written about many times in the past - all of the diversification benefits of the component countries gets blended away in a broad based product like VEU.

I think it is clear that VEU quacks a lot like EFA. During the last slow decline, at the start of this decade, EFA offered no protection, and during the next slow decline I doubt it or VEU will offer protection either. VEU will likely do better than the US market if the dollar stays weak or gets weaker, but the diversification benefits seem non existent to me.

IWV yields about the same as the S&P 500, and while the Vanguard website does not provide the yield for IWV it can't be much different than EFA which ETFconnect lists at 1.8%.

I am not opposed to the concept of a lazy portfolio but I don't think all the bases can be covered with four funds, let alone two. I am not sure what the optimal number is - but two ain't it.

Another reader asked if buying foreign stocks that trade on the pinks or bulletin boards is reasonable for a do-it-yourselfer. More and more there will be no choice. Many stocks have left the NYSE and I suppose there will be more.

As the reader notes, it is the bulletin board where many foreign blue chips trade. Relative to picking individual stocks, picking a blue chip from a foreign country is not the riskiest thing you can do even if it trades on the pinks. The companies report their numbers regularly you just need to work a little harder to access them (go to the company's website instead of Yahoo Finance). That one of the four or five largest companies on a foreign exchange is going to be a bellwether company that most of the time will be a proxy for its home market is not that difficult to grasp. Getting the timing right, understanding the market and a company's role in that market are all harder, and then figuring how to work it in to your portfolio might be harder still.

Avoiding fraud is not that difficult because it happens so rarely. This says nothing about success to be had, but very few stocks go to zero because of fraud and the odds that you would pick one that does are pretty slim.