 |
Vanguard ETF: |  |
7.4%* |
|
Diversified Core: | |
8.1%* |
|
Six Core Asset ETFs: | |
7.3%* |
Articles on Strategic
- TD Ameritrade Commission Free ETF’s Empowers Both Strategic and Tactical Asset Allocation
10/19/2010
The recent news that TD Ameritrade are providing over 100 ETF’s commission free is a perfect fit for a retirement portfolio. Investors are able to trade once a month and pick from a wide range of ETF’s without incurring any trading fees. Combine this with an IRA where the tax consequences of trading are removed and you have an almost ideal scenario and back tested returns demonstrate the point.
There is a continuing dilemma between wanting to increase returns while mitigating downside risk against the perceived risk of adopting a tactical asset allocation strategy. It is clear that tactical asset allocation consistently delivers higher returns at a lower risk. At the same time many are uncomfortable moving away from buy and hold which has been the mantra over the past twenty years.
In a previous article we introduced the notion of a core-satellite portfolio where the assets are split between tactical and strategic asset allocation strategies as a way of introducing tactical asset allocation in a step-by-step fashion.
TD Ameritrade making so many ETF’s available commission free allows another alternative to be considered and that is maintaining classic strategic asset allocation – i.e. all asset classes are fully represented at all times but with so many funds in each class, use fund momentum to rotate styles such that the funds in each asset class are regularly optimized.
CategoryJan-08Jan-09Jan-10Apr-10Jul-10Oct-10US EquitiesIWNVUG, MGKIWNVIGIWSVOInternational EquitiesEWJEWGEWJEWAAAXJAAXJEmerging MarketsEWZEWZEWZILFVWOVWOReal EstateVNQVNQVNQVNQVNQVNQCommoditiesDBCDBCDBCDBCDBCDBCBalanced FundAOKAOKAOKAOKAOKFixed IncomeSHY, WIP, JNKSHM, BWXSHY, WIP, JNKVCSH, BWX, JNKCASH, AGG, JNKCASH, AGG, JNKWe used the MyPlanIQ system to build and monitor a moderate risk (40% fixed income) strategic asset allocation portfolio. With five risk based asset classes, each of those classes would have 12% of the assets dedicated to them but the funds would be evaluated every month and the optimal fund selected based on the momentum within the class.
This can be compared with a Six asset SIB for which there is just one fund in each asset class.
From the performance chart, it is clear that there is increased upside potential from being able to switch funds within an asset class. Unfortunately, there is less ability to minimize downside risk when an asset class is under downward pressure.Despite this, for those who want to stay with a buy and hold in terms of asset classes, using this approach can squeeze some extra returns from the strategy.
With the large number of funds in six asset classes, momentum based asset allocation can be seen in its best light.
Portfolio Performance ComparisonPortfolio Name1Yr AR1Yr Sharpe3Yr AR3Yr Sharpe5Yr AR5Yr Sharpe13%87%13%86%20%128%10%83%-1%-6%9%46%11%93%1%5%8%40%Takeaways- ETF’s provide the basis for an outstanding portfolio with either strategic or tactical asset allocation. This is clearly demonstrated with TD’s wide range of commission free funds
- Using a web based application takes a lot of the effort from finding the best funds for either strategy
- Strategic asset allocation with styles rotation can deliver solid results using a well trusted strategy
- Tactical asset allocation greatly benefits from the large number of funds
labels:investment,
Symbols:GSG,DBC,AOK,EEM,GMM,PXH,DEM,SCHE,PCY,VTI,VT,IEV,VGK,PEF,DEB,EFA,VEU,GWL,PFA,EFG,EFV,PID,DWM,IFSM,VSS,SCHC,SCZ,IFGL,RWX,HYG,JNK,PHB,TIP,IEI,VGIT,ITE,AGG,CIU,BIV,BND,EWJ,JPP,PJO,DXJ,IVV,IYY,IWV,VV,SPY,DLN,RSP,SCHX,IVW,IWZ,JKE,VUG,ELG,QQQQ,RPG,SCHG,IVE,IWW,Commission,Free,ETFs,Strategic,Asset,Allocation,Tactical,Asset,Allocation,Asset,Allocation,styles,rotation,
- Armstrong Index Based Lazy Portfolio Returns Study
09/17/2010
Frank Armstrong, author of The Informed Investor, proposed thisportfolio for an MSN Money article. The two key points of the portfolio are that it has four asset classes (US, International, REIT, Bonds) and relies on market indices rather than active management.The portfolio uses index funds because index funds eliminate manager risk. It overweights small-cap stocks as small-cap stocks have historically outperformed large caps stocks. The portfolio has a strong value tilt, based on the theory that, over the long haul, beaten-down stocks will perform better than high-flying growth stocks.
This should be a low cost, well performing portfolio.The fund selection for testing the strategy is listed below with the ETF alternatives:- 9.25% in Vanguard Small Cap Value VISVX (SCZ)
- 9.25% in Vanguard Value VIVAX (SPY, IYY)
- 6.25% in Vanguard Small-Cap Growth VISGX (VBK)
- 6.25% in Vanguard 500 Index VFINX (IVW)
- 31% in Vanguard Total International Stock VGTSX (EFA)
- 8% in Vanguard REIT VGSIX (IYR, VNQ, RWX)
- 30% in Vanguard Short-Term Bond VBISX (BND, AGG)
Things to note about the portfolio:- This is designed as a lazy portfolio with limited rebalancing specified
- With 70% in equities, this would be considered an aggressive portfolio
- REIT is possibly underweighted
We will create historical returns of this portfolio as originally planned and then compare against strategic asset allocation (annual rebalance) and tactical asset allocation. This will measure:- The impact of equal weighting of the equities – bonds will be fixed at 30% -- SAA strategy
- The impact of actively managing the equities – bonds remain fixed at 30% -- TAA strategy
We will then introduce a four asset SIB which will give a measure of the choice of funds. The SAA and TAA strategies will give the same weights to each of the funds but use simpler asset classes funds.4 Asset SIB Breakdown with ETF alternativesLARGE BLEND VTSMX (VTI)Foreign Large Blend VGTSX (VEU)REAL ESTATE VGSIX (VNQ)Intermediate-Term Bond VBMFX (BND)The results are shown below. There are a number of interesting things to note- The closest comparison of similar strategies is the Armstrong Original versus the Armstrong SAA. The Armstrong original outperforms SAA which says that overloading the US stocks towards small value is successful
- All of the buy and hold strategies suffer from the “downturn dip” and the tactical asset allocation strategies perform much better
- The difference between the two TAA strategies is negligible
Annual Returns 1 Year 3 Years 5 Years Original 8.83 -0.88 4.27 Armstrong SAA 13.91 -2.60 2.96 Armstrong TAA 12.71 7.30 10.43 4 SIB SAA 14.12 0.25 4.59 4 SIB TAA 12.32 7.15 10.21
Takeaways:- The Armstrong portfolio is a well constructed set of diversified assets based on market indices
- To reduce volatility in today’s economy, it might make sense to add commodities and emerging market equities
- The biggest impact on returns is moving to a tactical asset allocation strategy
- The SIB portfolios which can easily be executed with ETF’s perform very well and will be low cost
labels:investment,
Symbols:DIA,IYY,VTI,DVY,ONEQ,QCLN,QABA,PWC,VTV,VUG,IWM,IWO,IWW,MDY,IJJ,IJK,VO,AGG,BND,SHY,VBK,IJS,VBR,IWP,IWS,VEA,EFG,EFV,VWO,VEU,SCZ,SPY,IYR,IVW,RWX,EFA,VNQ,Tactical,Asset,Allocation,asset,allocation,armstong,ideal,index,strategic,asset,allocation,
