Does a Four Asset ETF Portfolio beat a Three Asset ESIB Portfolio
01/11/2011 0 comments
We are in a series of articles examining the limits and benefits oftactical asset allocation compares to strategic asset allocation.
We started with
the 3
Asset SIB (Simpler Is Better) Portfolio -- one index fund in each asset class. We introduced ESIB3 an extended SIB. An ESIB has
multiple funds in each asset class. We saw how an ESIB improved performance over the SIB.
In this article, we compare the ESIB3 with a SIB4. This
enables us to quantify the difference between a portfolio with multiple funds in three asset classes against a portfolio with on fund in each of four asset
classes.
The ESIB3 comprises ten funds. These funds provide access to three major assets: US and
foreign equity and fixed income.
| Asset Class | SIB4 | ESIB3 |
|---|---|---|
| REITs | 0 | |
| Balanced Fund | 0 | |
| Fixed Income | 2* | 5* |
| Commodity | 0 | |
| Sector Fund | 0 | |
| Foreign Equity | 1 | 2 |
| Emerging Market Equity | 1 | 0 |
| US Equity | 1 | 3 |
| Other | 0 | |
| Total | 5 | 10 |
*Note that both portfolios have cash (money market) as an additional fund in fixed income. This compares favorably with the 3 ETF SIB's rating of 12%. Performance chart (as of Jan 7, 2011) Performance table (as of Jan 7, 2011)
When we compare the historical results:
| Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| Four Core Asset ETF Index Funds Emerging Markets Tactical Asset Allocation Moderate | 0% | -0% | 6% | 57% | 11% | 68% |
| Four Core Asset ETF Index Funds Emerging Markets Strategic Asset Allocation Moderate | 9% | 71% | 3% | 11% | 7% | 28% |
| ESIB-3 Tactical Asset Allocation Moderate | -0% | -2% | 2% | 24% | 5% | 44% |
| ESIB-3 Strategic Asset Allocation Moderate | 11% | 113% | 2% | 9% | 4% | 23% |
We note that the ESIB had better returns in 2010 -- driven by the strength of US equities --
especially in the last quarter of the year. However, as soon as the time horizon stretches out, the additional asset class starts delivering higher
returns.
It is critical to have a long term view and not get caught up in short term exuberance.
In the next articles we will look at how the strategies drive asset ownership and where it is effective and where it is not.
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