Replacing VEA and EFV with PID, PIZ Boosts Morningstar Clone Across the Board

03/01/2011 Share 0 comments

In a previous article we looked at how the ETFs compared with managed funds available in the Morningstar 401K plan – we are using this as an excellent example of a plan with a reasonable number of funds that can still deliver a portfolio with good returns.

We summarized the differences between the ETF clone and the original by creating a score for each fund and then summing them up by major asset class. This gave us the following table:

We noted that the two areas of biggest concern were the international equities and the fixed income. We speculated that it might well be difficult to emulate the managed fixed income performance delivered by two of the leading companies in that area PIMCO and Loomis Sayles.

In this article, we start by reviewing the international equities class to see if we can close the gap between the clone and the original. We recognize that this might be considered cherry picking in the sense that we are using historical returns that may not be reflected going forward. Nevertheless, the exercise will be instructive, even if only to show where it can be dangerous to just chase returns.

With international equity, the current funds are:

When we looked at the alternative ETFs, we reduced it to the following choices:

There are some intriguing choices and as time goes on, there will be increasing numbers with more established history.

·         We chose PID because of strong returns and because dividend ETFs go for solid companies and in the current environment, that is a sound choice

·         We chose PID because of its strong results. There is something of risk because of the shorter history but we selected it nevertheless

When we swap out VEA and EFV for PID and PIZ, we see the following historical behavior

Performance chart (as of Feb 28, 2011)

Performance table (as of Feb 28, 2011)

As we mentioned earlier, it is important not to fall into the trap of just chasing returns and we note that over the longer time horizons, this switch has degraded returns for the strategic asset allocation.

However, we note that this has bumped tactical asset allocation across the board.

In the next article, we will look at the impact of fixed income.

Disclosure:

MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Symbols:EFA,IDV,SCHF,PID,EFG,PIZ,EFV,VEA,

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