Porfolio composition discussion

I will shut up about my personal view, but point out some probably valuable resources to compare and contrast. Here is a clear table of the current and target asset allocations of CalPERS pension fund

I earlier posted a similar one by Northern Trust Bank and probably many institutions publish them (university endowments, sovereign funds?). Of course they don't fully live by your preconditions or goals, but they are recognized centers of expertise. Oh here is CalSTRS which is swinging for the fences in Japanese equity: CNBCny today interviewed CIO's of CalPERS and the rival CalSTR together today and I believe it was CalSTRS upping the risk to overcome low funding and falling behind CalPERS. They take comfort that the taxpayer makes up any money they lose, so maybe not the best example to follow.

Asset classes...Allocation to "non-large" stocks is large - do you believe very strongly that smaller-cap stocks, in general, will perform better over the long haul (including in foreign markets)? Your mix suggests that you do, which is fine, but if you don't - why so high? And did you intentionally omit midcaps? You'd get them with a "total market" kind of core holding.

Investments...nothing specific, just generally...using that many ETFs could lead to a lot of trading costs if you plan to round-trip buy/sell to rebalance the mix, or invest or withdraw smaller amounts periodically. Owning traditional no-load mutual funds through the fund company can reduce that cost. Not just commissions, but also trading spreads and discount/premium to NAV. Also, when looking at funds vs. ETFs I have concerns about how ETFs will perform in less-liquid asset classes, especially when things get interesting. I don't know how the whole ETF creation/redemption process could hold up in a period of high volatility or inflows/outflows, if the ETF holds stuff that is hard to trade (and by extension hard to value every millisecond).

-Tad

He's got 50% large (split between value and blend) and 50% small/micro.

There's some vagueness - mid-caps fall where? - but it's not an outrageous oveweight to small-caps.

By comparison, and using Morningstar size breakdowns, Flexshares TILT

-- which is intented to emphasize small-cap and value (ie. Fama/French factors) -- is about the same breakdown: 50% large (including mega) and

50% small (including most of mid-caps).

The total market, with market-weight indices (ie. Vanguard's VTI) is about 71% large/mega and 29% micro/small/mid.

That's a big difference, but it's not huge. I see folks come in all the time with vast overweights one way or the other (though more often, folks are overweight large/mega and only occasionally have more than

50% small).

Merriman also does a 50/50 large/small breakdown (though I think he extracts REITs first) within domestic. He also, pretty aggressively, splits about 50/50 domestic/foreign, IIRC.

Sometimes -- it works if you're buying all within one family and from that family directly (ie. an all-vanguard portfolio, implemented at Vanguard themselves).

If you're buying various no-load funds via fund supermarkets (ie. buy Vanguard funds within a Fidelity brokerage account), you'll either get clobbered with transaction fees, or you'll pay much higher expense ratios (the latter for funds in the "no-transaction-fee" lists).

Rick Ferri write an article about this issue particularly with respect to corporate bond ETFs (the effect was vastly worse for junk bond funds than for investment grade ones).

I think it's much less of an issue for most of those equity funds our OP was talking about, but it's certainly something worth being careful with.

I'll dig up a link if I can find it.

It may do well - if lots of folks want to sell, the manager can ride it out by turning out creation unit bundles to the market makers, and folks who hold won't get screwed unless they, too, want to liquidate in a panic.

Meanwhile, if folks sell open-ended funds in a panic, the whole pricing mechanism may blow up on them because they have to redeem in cash based on prices which may have no basis in reality, potentially screwing up either the fund company or folks who continue to hold shares.

Vanguard may have solved the whole problem by making their ETFs a share class of their open-ended funds.

And for highly illiquid market areas, CEFs may still make sense, at least if they aren't overpriced (ie. high expense ratios), trading at a premium (or even a smaller discount than "normal") and if not too leveraged (lots of CEFs are highly leveraged, no thanks).

Anyway, the OP has, generally, selected very widely held highly liquid ETF shares.

He may be missing out on some asset classes worth holding such as REITs, commodities (though those can be a minefield), and even some hedge-fund/arbitrage style assets, but by and large, it's not a particularly wild portfolio and looks quite comparable to Merriman's recommendations.

(Note that I am *not* recommending either the OP's specific list of funds, or Merriman's, or TILT or VTI. Just putting them out there as points for comparison and discussion)

As a follow-up to this thread last month...today's FT has a short piece on how some of the market-making and creation-redemption broke down for several ETFs yesterday. It mentions bond and emerging-market ETFs, which I consider less-liquid asset classes. And yesterday was not exactly a barn-burner in terms of volatility and price drops.

Bond market sell-off causes stress in $2tn ETF industry June 21, 2013 FT.com

Snippet: "The selling also caused disruptions in the plumbing behind several ETFs. Citigroup stopped accepting orders to redeem underlying assets from ETF issuers, after one trading desk reached its allocated risk limits. One Citi trader emailed other market participants to say: 'We are unable to take any more redemptions today?.?.?.?a very rare occurrence due to capital requirements we are maxed out on the amount of collateral we have out.'"

-Tad