Long Term Treasury Bonds ETF in David Swensen's Six ETF Plan
06/02/2011 0 comments
Retirement investing is a long term process. This report reviews David Swensen Six ETF Asset Individual Investor Plan plan. We will discuss the investment choices and present the plan rating by MyPlanIQ. Current economic and market conditions are discussed in the context of the investment portfolios in the plan. We will then show how investors in David Swensen Six ETF Asset Individual Investor Plan can achieve reasonable investment results using asset allocation strategies.
Plan Review and Rating
David Swensen, the Yale Endowment Manager, proposed this one size fit in all model portfolio for individual investors. The major difference between this portfolio and other conventional portfolios is that it emphasizes international equities (including emerging market equities) as well as real estate investment. Compared with various diversified portfolios, an interesting asset class missing is the commodities, which has been considered to be an excellent anti-inflation diversifier. This is complemented with its emphasis on the inflation-protected treasury bonds. We assume annual rebalance although Swensen actually pointed out that in Yale's institutional portfolio, they rebalanced daily, which, by his estimate, gave about 1-2% of excessive returns vs. annual rebalancing.
Compared with the Simpler Is Better (SIB) portfolios discussed in an article, one can see that Swensen's six assets exclude the commodities while putting emphasis on using fixed income for the purpose of inflation protection and hedging.
Note: it has been confusing whether Swensen advocated using long term treasury bonds or just an average duration treasury bonds. In his book Unconventional Success: A Fundamental Approach to Personal Investment, he wrote "The purity of noncallable, long-term, default-free Treasury bonds provides the most powerful diversification to investor portfolios". Based on this sentence, it has been interpreted that he meant to use the long term treasury bond. However, recently, a reader posted a reply from David Swensen on this question in morningstar.com, which indicates the average duration of treasury bonds.
The portfolio consists of the following:
- 30% in Vanguard Total Stock Market Index (VTI)
- 20% in Vanguard REIT Index (VNQ)
- 20% in Vanguard Total International Stock (VEU) or (15% in VEU and 5% in VWO)
- 15% in Vanguard Inflation Protected Securities (TIP)
- 15% in Vanguard Long Term Treasury Index (TLT)
The above model portfolio should be compared with the moderate model portfolios in this ETF plan.
David Swensen Six ETF Asset Individual Investor Plan consists of 7 funds. These funds enable participants to gain exposure to 5 major assets: US Equity, Foreign Equity, REITs, Emerging Market Equity, Fixed Income.
As of Jun 1, 2011, this plan investment choice is rated as average based on MyPlanIQ Plan Rating methodology that measures the effectiveness of a plan's available investment funds. It has the following detailed ratings:
Diversification -- Rated as above average (80%)
Fund Quality -- Rated as average (41%)
Portfolio Building -- Rated as average (46%)
Overall Rating: average (55%)
Current Economic and Market Conditions
As we are clearly entering a seasonally weak period for risk assets, global economies have clearly slowed down. Recently released Case-Shiller housing index showed that the U.S. is now in a double dip state for housing prices. Unemployment rate has been stuck at 9% level. Additional indicators such as conference board consumer confidence index and Chicago ISM index are all pointing to a slow down in the summer season.
Amid a string of bad economic news, risk assets have come down a bit, though they are still ranked high at the moment. Long term treasury bonds, however, have shot up in the anticipation of weakened economy. The following table shows the major asset class ranking in terms of their momentum.
| Assets Class | Symbols | 05/27 Trend Score | 05/20 Trend Score | Direction |
|---|---|---|---|---|
| International REITs | RWX | 11.77% | 10.82% | ^ |
| Commodities | DBC | 10.84% | 10.32% | ^ |
| US Equity REITs | VNQ | 10.77% | 10.41% | ^ |
| Gold | GLD | 9.42% | 10.06% | v |
| Emerging Market Stks | VWO | 8.56% | 6.72% | ^ |
| US Stocks | VTI | 8.29% | 8.23% | ^ |
| International Developed Stks | EFA | 6.77% | 5.23% | ^ |
| US High Yield Bonds | JNK | 6.37% | 6.37% | v |
| International Treasury Bonds | BWX | 5.96% | 4.66% | ^ |
| Frontier Market Stks | FRN | 4.05% | 4.27% | v |
| Emerging Mkt Bonds | PCY | 3.57% | 4.27% | v |
| Intermediate Treasuries | IEF | 2.71% | 2.39% | ^ |
| US Credit Bonds | CFT | 2.5% | 2.81% | v |
| Municipal Bonds | MUB | 2.13% | 2.0% | ^ |
| Total US Bonds | BND | 1.99% | 1.92% | ^ |
| Mortgage Back Bonds | MBB | 1.75% | 1.8% | v |
| Treasury Bills | SHV | 0.07% | 0.02% | ^ |
Portfolio Discussions
The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies. 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
Emerging Market Equity: EEM or VWO
REITs: IYR or VNQ or ICF
Fixed Income: AGG or BND
Performance chart (as of Jun 1, 2011)
Performance table (as of Jun 1, 2011)
| Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| David Swensen Six ETF Asset Individual Investor Plan Tactical Asset Allocation Moderate | 13% | 125% | 7% | 60% | 12% | 80% |
| David Swensen Six ETF Asset Individual Investor Plan Strategic Asset Allocation Moderate | 16% | 146% | 5% | 21% | 8% | 38% |
| Five Core Asset ETF Benchmark Tactical Asset Allocation Moderate | 12% | 109% | 8% | 70% | 11% | 75% |
| Five Core Asset ETF Benchmark Strategic Asset Allocation Moderate | 19% | 167% | 4% | 16% | 7% | 27% |
At the moment, the long term treasury bonds ETF TLT is held in both the tactical and strategic moderate portfolios.
To summarize, investors adopting David Swensen Six ETF Asset Individual Investor Plan plan can achieve reasonable investment returns by adopting asset allocation strategies that are tailored to their risk profiles.
Exchange Tickers: (VTI), (VEU), (VNQ), (VWO), (TIP), (TLT), (CASH), (BND)
Symbols: VTI, VEU, VNQ, VWO, TIP, TLT, CASH, BND
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