ETF Cloning of Fidelity Variable Annuity

11/23/2010 Share 0 comments

In a previous article noted that Variable Annuities have well chosen sub account funds that can lead to a portfolio that can deliver good returns. We examined the Fidelity Personal Retirement Annuity and broke down its funds.

In Summary, the Fidelity Personal Retirement Annuity's plan consists of 56 funds. These funds enable participants to gain exposure to 5 major assets: US Equity, Foreign Equity, REITs, Emerging Market Equity and Fixed Income.

We are now going to build a clone plan and see how it performs. We will simplify the choice and not duplicate styles.

US Funds

The US funds provide access to large, mid and small cap funds. Large Cap funds are probably overweighted, especially on growth. Having more mid cap value and small cap value would improve the portfolio slightly. Nevertheless, this is a high scoring section. 

International Funds

This is a good international section. Large cap are overweighted, medium and small cap funds would be a good upgrade.

Emerging markets

Three alternative funds in this category is a good choice. It may be that having some large or mid-cap blend would provide a good alternative.

Real Estate

Real estate is under represented -- an international REIT would strengthen this asset class.

Fixed Income

The fixed income class is well balanced with good choices and diversification.

Even without going into the balanced funds, there are enough funds here to build a solid portfolio. 

While the managed funds are available, the fee structure is such that the returns are going to leak into other people's pockets and it will pay you to be on top of your own investments -- either directly or through a professional.

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA, both provided by MyPlanIQ). For comparison purpose, we also include the moderate model portfolios of a typical 5 asset SIB (Simpler Is Better) plan. This SIB plan has the following candidate index funds and their ETFs equivalent:

US Equity: SPY or VTI
Foreign Equity:  EFA or VEU
REITs : IYR or VNQ or ICF
Emerging Market Equity :EEM or VWO
Fixed Income :AGG or BND

Performance chart (as of Nov 15, 2010)

Performance table (as of Nov 15, 2010)

There is an opportunity to build good returns and benefit from the tax free gains while mitigating the known high fees of this type of instrument.

There are certainly the funds in the plan to make this possible and overlaying a tactical asset allocation is empowered by the range and richness of the funds.

labels:investment,