Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on  Monday, December 29, 2014. You can also find the re-balance calendar for 2014 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

Implementing Core Asset Portfolios In a Brokerage

As many readers know, we have been advocating simple plans since we started our service. We use ‘Simpler Is Better’ (SIB) to name those plans and their portfolios that use only low cost, broad base index funds. In this newsletter, we will discuss this subject in more details. 

SIB Plans and Portfolios

The most representative plan is our Six Core Asset ETFs, which is listed on our brokerage page. The following is its description and its candidate funds: 

6 low cost candidate index ETFsrepresenting 6 major asset classes: U.S. stocks, international developed country stocks, emerging market stocks, U.S. Real Estate Investment Trusts (REITs), commodities and U.S. total bond markets. Focuses on asset allocation & diversification.

It consists of only six index ETFs: 

Other than commodities (DBC), all other candidate funds are Vanguard ETFs, which have extremely low cost. Even taking DBC into account, the average expense for all six funds is 0.24%. 

If we take the commodities fund DBC away, we have Five Core Asset ETFs. The average expense of the five funds is 0.12%. Note, you can find the average expense ratio info by visiting a plan page like this one and then click on ‘All Fund Parameters’ tab in the ‘Investment Options’ section. 

In MyPlanIQ, we consider Fixed Income, Commodity, Foreign Equity, REITs, US Equity, Emerging Market Equity as core major asset class.  On the other hand, US small cap value, mid cap growth etc. are considered lower level (narrow) asset classes. 

The advantages of using one broad base index fund for each core major asset class: 

  • Extremely low cost
  • Simpler to implement in your actual accounts
  • Broad base index funds tend to more stable than lower level index funds, thus less performance surprise. 
  • Broad base index funds are highly liquid, thus much less subject to trade friction (bid and ask spread) and manipulation. Furthermore, investors do not need to worry about perturbation created by crowded trades (an often asked question is that what would happen if there are so many users who are following MyPlanIQ portfolios all try to rebalance on the same day).  

For ETFs, the best and low cost ETF index funds are from the following three families: 

  • Vanguard ETFs
  • iShares ETFs
  • Schwab ETFs (though somewhat limited and less liquid)

Vanguard ETFs are our first goto ETFs. They have the lowest expenses and one of the best in terms of implementation. There are a couple of special funds such as SPDR (Spider) S&P 500 fund SPY that is most liquid and very reasonable expense ratio (0.09% vs. Vanguard 500 ETF VOO’s 0.05%). 

These SIB plans have excellent performance as shown by the following table: 

Portfolio Performance Comparison (as of 12/8/2014):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate 5.1% 6.3% 8.4% 7.6% 6.0% 0.38
Five Core Asset ETFs Strategic Asset Allocation – Optimal Moderate 7.0% 8.0% 10.0% 8.4% 5.7% 0.35
Vanguard Liquid ETFs Strategic Asset Allocation – Optimal Moderate 5.1% 6.5% 9.8% 8.2% 5.8% 0.35
Six Core Asset ETFs Tactical Asset Allocation Moderate 3.6% 5.6% 8.0% 7.2% 10.1% 0.9
Five Core Asset ETFs Tactical Asset Allocation Moderate 3.6% 5.6% 7.1% 7.6% 10.0% 0.88
Vanguard Liquid ETFs Tactical Asset Allocation Moderate 2.8% 4.8% 9.0% 8.7% 9.8% 0.82

See detailed year by year comparison >>

For mutual funds, there are really just Vanguard index funds for retail investors. For advisor managed accounts, you can also access to Dimensional Funds Advisors (DFA) funds that are only available to advisor managed accounts. However, it is also possible to get Vanguard admiral funds that have even lower expense ratios than regular Vanguard funds (investor class funds). 

Implement SIB Portfolios In a Brokerage

Even though we have featured plans on  brokerage page that use brokerage suggested (often commission free) ETFs, these plans are however not necessarily the best. In fact, for many investors, implementing SIB portfolios in a brokerage might be more preferable. Let’s take a look at how to implement a six core or five core portfolio in various brokerages: 

TD Ameritrade: Using its 101 commission free ETFs, both Six Core Asset ETFs and thus Five Core Asset ETFs can be implemented without any change. In fact, one can almost be certain to implement the entire Vanguard Liquid ETFs plan using TD Ameritrade 101 commission free ETFs. We strongly encourage our users with a TD Ameritrade account to take a notice on this. 

Schwab: Even though Schwab ETF OneSource features more than 175 commission free ETFs, we found them not entirely satisfying for our purpose.  We have constructed a plan that uses only Schwab’s ETFs (they are all commission free in Schwab) Schwab Five Core Asset ETFs. The average expense of the funds in this plan is 0.12%, the same as that in Five Core Asset ETFs

The following shows how Schwab index ETFs in Schwab Five Core Asset ETFs are compared with their Vanguard counter parts: 

Portfolio Performance Comparison

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
SCHB (Schwab U.S. Broad Market ETF) 13.1% 17.4% 20.6% 1.7 16.1% 0.98
VTI (Vanguard Total Stock Market ETF) 13.0% 17.2% 20.6% 1.68 16.1% 0.98
SCHF (Schwab International Equity ETF) -2.3% 2.4% 10.4% 0.71 5.5% 0.27
VEA (Vanguard MSCI EAFE ETF) -2.3% 2.2% 11.2% 0.75 5.7% 0.27
SCHE (Schwab Emerging Markets Equity ETF) 2.4% 4.8% 3.3% 0.19    
VWO (Vanguard MSCI Emerging Markets ETF) 3.2% 5.6% 3.5% 0.19 2.6% 0.11
SCHH (Schwab US REIT ETF) 30.6% 29.9% 17.5% 1.24    
VNQ (Vanguard REIT Index ETF) 28.0% 28.2% 17.4% 1.27 17.0% 0.83
SCHZ (Schwab U.S. Aggregate Bond ETF) 5.6% 5.1% 2.5% 0.85    
BND (Vanguard Total Bond Market ETF) 5.2% 5.2% 2.0% 0.66 3.6% 1.07

Note, as Schwab ETFs have no more than 5 year history (in fact, 3 of them have history shorter than 5 years), only the 3 year portfolio performance is meaningful for Schwab Five Core Asset ETFs

We also note that SCHF (Schwab International Equity ETF) has done much worse than Vanguard’s VEA in the last 3 year time period. Other than this, this plan is closely matching Vanguard’s ETFs. 

The other drawback for using Schwab’s ETFs is that they are not as liquid as Vanguard’s ETFs. However, for many small to mid sized accounts, these ETFs are still adequate. 

Fidelity: Unfortunately, Fidelity has changed its policy in terms of offering commission free ETFs. It now only offers commission free for purchase, not for sale. This is making it less attractive. Nevertheless, we have constructed an iShares ETFs (commission free for buy) plan Fidelity Five Core Asset ETFs.  Notice that both international stock fund IEFA and emerging market stock fund IEMG only have less than 2 year history so anything beyond that is less meaningful. 

We also would like to note that both these funds have very little daily volume and that can present challenge for rebalancing. 

Portfolio Review

Our ETF tactical portfolios on brokerage page have again lagged behind their SAA counter parts so far this year:

Latest Brokerage Specific ETF Tactical Portfolio Performance Comparison

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR
Fidelity Commission Free ETFs Tactical Asset Allocation Moderate 1.0% 2.8% 7.5% 8.4% 9.3%
Schwab Commission Free ETFs Tactical Asset Allocation Moderate 0.3% 2.4% 8.9%    
TD Ameritrade Commission Free ETFs Tactical Asset Allocation Moderate 1.3% 3.2% 6.5% 6.9% 8.1%
Vanguard Liquid ETFs Tactical Asset Allocation Moderate 2.8% 4.8% 9.0% 8.7% 9.8%
Etrade All Star ETFs Tactical Asset Allocation Moderate 1.5% 3.6% 7.9% 8.0% 10.5%
Schwab ETF Select List Tactical Asset Allocation Moderate 4.1% 5.9% 5.4% 7.4% 8.2%
Six Core Asset ETFs Tactical Asset Allocation Moderate 3.6% 5.6% 8.0% 7.2% 10.1%
MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate 1.3% 3.2% 8.0% 7.6% 9.7%
Retirement Income ETFs Tactical Asset Allocation Moderate 1.4% 3.1% 7.0% 8.2% 9.9%

Most of these portfolios under performed the Six Core Asset ETF portfolio because of the under performance and volatile nature of narrow base index funds such as small cap stock funds. 

Market Overview

Even though US stocks continue to be close to its record high, high yield bonds continue to decline, flashing a strong signal. One of the reasons for high yield bond weakness might be due to the recent crude oil price debacle. Regardless, if credit market suffers from a serious damage, it is hard to imagine stocks are not affected. 

We also note other than US stocks and US REITs, all other assets are ranked below US bonds in our trend ranking. 

For more detailed asset trend scores, please refer to 360° Market Overview.

We would like to remind our readers that markets are more precarious now than other times in the last 5 years. It is a good time and imperative to adjust to a risk level you are comfortable with right now.  However, recognizing our deficiency to predict the markets, we will stay on course. 

We again copy our position statements (from previous newsletters): 

Our position has not changed: We still maintain our cautious attitude to the recent stock market strength. Again, we have not seen any meaningful or substantial structural change in the U.S., European and emerging market economies. However, we will let markets sort this out and will try to take advantage over its irrational behavior if it is possible. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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