A Model All-ETF Portfolio That Works

Roger Nusbaum submits: Geoff Considine put up a post a while back on Seeking Alpha on all-ETF portfolios vs. use of individual stocks alongside ETFs. Geoff tends to write very long articles and truthfully I did not read the whole thing (far from it), but that is not the point here. The post drew an interesting comment from XTF Advisors, a firm that appears to specialize in ETF Portfolios.

Their comment was that Geoff's article used data mining to make its point and they note their belief that "ETFs may offer the best available option for efficient asset allocation without negative-alpha risk and with low expenses."

The XTF website shows the composition of three different all-ETF portfolios. I guess the product is new, because the results provided are back tested.

The portfolio I looked at is called Tack 80 and was comprised as follows on March 31;

Large Cap (SPY) 36%
Mid Cap (VO) 20.40%
Small Cap (IWM) 12%
Foreign (EFA) 27.6%
REITs (VNQ) 1.65%
Short Term Bonds (SHY) 0.30%
Intermediate Bonds (IEF) 0.30%
Long Term Bonds (TLT) 0.45%
Corporate Bonds (AGG) 0.30
Cash 1%

I don't know how it has done since 3/31, nor did I even count if it adds up to 100%. Whatever the strategy is here the back test numbers are very good -- they soundly beat the S&P 500 for the last five years. I did not read enough to get a feel for their process but the back test shows it can be done with just ETFs.

It does seem like there are many parts of the market missed with such a narrow selection. XTF is not wrong, but the approach is not right for me. Is such a narrow list right for you is what is important. I have written countless times about my belief of tying in numerous themes to make a diversified portfolio. I think it makes the ride smoother and the job easier.

I have had help with returns from some fairly narrow things. In the second quarter of 2005 Statoil (long time holding) went from $14 to $21 in about ten minutes (intentional hyperbole). This happens a fair bit where some country or forgotten sector adds a lot to the portfolio. This element is clearly not going to happen in the above portfolio. A narrow theme like Norway does not have enough weight in EFA to matter.

Again, this is about different mousetraps -- not right and wrong. Only time will tell whether the actual returns will measure up to the back test but you have many schools of thought here (XTF, Geoff and me) to try to make what you do better and that really is the most important thing with this.

Comments

[GeoffConsidine]

But---using a back test to justify the strategy does not make sense. We can identify an infinity of portfolios that would beat the S&P500 in retrospect. This is a very generic portfolio mix--a bit on the heavy side of textbook for foreign, but we are seeing more of that. My point earlier was that individual stocks allow you to do a better job of exploiting diversification effects. I showed historical analysis, but this argument is also backed up by an extensive body of research on diversification in the literature as well as the basic laws of statistics.

Any person who has watched the market could look at this mix and know that it would have outperformed in recent years. I am not sure what such a backtest does show without some further supporting reasoning.

[Don Smith]

I don't know how it has done since 3/31, nor did I even count if it adds up to 100%. Whatever the strategy is here the back test numbers are very good -- they soundly beat the S&P 500 for the last five years.

Login and take a look at what it has done - go2mypv.com/login.aspx username and password desmith

Enjoy

Don

[Don Smith]

Once in the site Click on the Portfolio name and a nice summary of that portfolio will appear. If you understand Point & figure charts while in that screen click on Overview at the top of the page and you will be directed to a point & figure chart of the portfolio as a whole. Have fun gentlemen. If you like this tool shoot me an email [e-mail]

[RogerNusbaum]

Don

Thank you. The result is interesting. For those who don't check it is down 3% from 3/31 through today. However we do not know if XTF made chmages along the way that might have yielded a different result.

Geoff,

Your are right about backtesting being a tough way to make an argument but trying to chop into that aspect of it did not seem like it would be beneficial to readers.

[WC Whiner]

You don't even have to look at the tickers to know what's going on here: Large Cap 36% and Foreign 28% say it all. Remember, almost everything has beaten the S&P 500 the last half-decade. If you are underweight it, of course you beat it. I was all set to regress their backtest against some indexes, but they have (gag) a Flash site. If anyone wants to post their monthlies for me, I'll pump them into R real quick.

FD: my little account "soundly beat" the S&P 500 for the five years ended 3/31/06 (alpha 0.8% per month vs that index, t-stat 2.5), but I do not think that speaks to anything than a couple lucky plays and my particular style having been in favor.