The 4 ETF Starter Portfolio

Jul 11, 2011 2 Replies
D

Seen today on Investopedia:



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Summary:



SPY, DBC, TIP and EEB Start with a foundation: SPY = SPDR S&P 500 index Add raw materials: DBC = Powershares DB Commodity Index Tracking Fund Mix in fixed-income: TIP = iShares Lehman TIPS Bond ETF A dash of international flavor: EEB = Claymore/BNY BRIC ETF



My first impressions:



(a) they give no indication whatsoever about what kinds of proportions make any sense (b) no small-caps (c) all developed markets exposure is apparently meant to be through the multinationals in the S&P500, since EEB is all Brazil, Russia, India and China (d) no traditional fixed-income (e) no real estate (f) DBC, while interesting, can have messy implications. It's not really an ETF - it's an LP and you'll get a K-1 from it, moreover, it's constructed using futures contracts, which have other tax implications as well.


I don't think I'd call this a "starter" portfolio, but rather, "some interesting funds to consider".



Perhaps a better - and simpler - two-fund starter portfolio would be a pair of Vanguard Total World Stock Index ETF (VT) - which has both large and small-caps, as well as both developed and emerging markets - paired with their their bond ETF which tracks the Lehman Agg (BND). (Note that, like the author of that investopedia article, I am also not mentioning asset allocation)


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D

Looking at past performance, the "better" proposal is nearly equivalent to the original SPY + TIP without the better performing DBC

  • EEB. In last 5 years the "better" proposal would give nearly dead money, while EEB about doubled your money:
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    Looking at diversification, note how VT aped SPY in almost every nuance and wiggle of the curve (yield is barely better also). VT appears to be cap weighted into a fangless lookalike of the SP500 and it's world stocks may be lookalikes. I remember the Vanguard US allcap etf being promoted as a revolution even though it mirrored SP500. Those probably ARE better than SPY (especially if world markets decouple), but only by a bit.
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D

Past performance - may be deceptive. I'm going to run some numbers - I want to examine the volatility and the correlations. And note that selection of time-periods makes a huge difference.

5yrs very much favors EEB. Make it 3yrs and both SPY and TIP beat EEB and *trounce* DBC.

Since these four funds are a pretty diverse set of asset classes, though, it should be possible to put together a portfolio taking advantage of the assets different correlations. The article, unfortunately, left the hard part - how to put them together, how to measure the risk of the overall portfolio, as an exercise for the reader. That makes it interesting, but certainly not a "starter" portfolio.

That said, I appreciated the article getting me thinking more about EEB and DBC. I'm not sure I'd fold them into a portfolio, but they are certainly worth keeping an eye on.

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