November 17th, 2011 by

Barrons ETF Expert Portfolios-Not much in the way of innovative thinking. By Roger Rusbaum

One of the features in this week’s Barron’s included an interview with three investment advisors who were billed as ETF experts using all-ETF portfolios for clients. Obviously I have no idea where Barron’s found these guys but the conversation read like something you could have read four years ago at IndexUniverse (that is a compliment to IndexUniverse and a shot at the Barron’s article). Each interviewee provided specifics of the mix they use with percentages; two of them seemed to be very odd in terms of specifics and one of them was actually more like a slice of a bigger pie but was more interesting than the other two.

First things first, I’ve often said that all-anything portfolios don’t make sense to me. It is not logical that the best way to capture every part of the market that an investor would want to own could all be in the same wrapper. It seems only logical that someone with the time and inclination would own various wrappers after studying the alternatives for each desired exposure.

There are logistical considerations like it not being economically efficient for a $28,000 account to have seven ETFs and 20 individual stocks but where there are not logistical constraints: going all-anything is artificial.

There was one wildly self-serving comment in there that made me literally laugh out loud:

…have convinced me more than ever that investing is not a do-it-yourself, at-home proposition.

The context was levered ETPs but as the advisor does not use levered ETPs, it just struck me as a very funny comment. Like all investment products, levered ETPs have pluses and minuses that people should weigh out for themselves and then either use or avoid. One point that was implied was that levered funds do progressively worse over time but that is not accurate. Some have done progressively worse over time and going forward this will be the case with some of them but the key determinant of how these particular types of funds will perform over periods exceeding one day is the combination of up and down days that come. This might be reason enough to avoid the funds which would be perfectly valid but it makes sense to have accurate information about the product.

There was one interesting nugget that seemed to be behavioral in nature which is that clients of one of the advisors tend to be more critical during declines of actively managed funds than ETFs because active managers should know better about certain types of blow ups. But with ETFs, the index is what it is and his clients apparently understand the difference. This was interesting.

As mentioned, two of the portfolios seemed odd to me. One of the portfolios owns the SPDR S&P 500 (SPY), Dow Diamonds (DIA), SPDR S&P Dividend (SDY) and iShares S&P 500 Value ETF (IVE) totaling 27.8% of the overall portfolio and 55% of the equity portion. All four are variations on the same thing, that being US mega caps, and the correlation between all four has been very tight. One note is that IVE may not be the correct fund, Barron’s just has it listed as iShares S&P Value so it could be Small Cap Value (IJS), not large cap value. Still, I cannot imagine there is any need to own both SPY and DIA.

The other odd portfolio had 16 different broad-based ETFs comprising 50% of the portfolio for what the manager thinks of as equity exposure (more on that in a moment). The reason to mention this is that there were two different domestic large cap growth ETFs, two different domestic mid cap growth ETFs, two different domestic mid cap value ETFs, two different domestic small cap growth ETFs, two different domestic small cap value ETFs and both EEM and VWO. In all of the listed asset classes above there is an even split between the iShares version of the fund and the Vanguard version of the fund.

Obviously the weightings are tiny. In several instances the allocation to the funds are less than 2%. This is baffling.

This same portfolio also allocates 2.5% to “equity based commodities” spread across five ETFs. The largest weightings in this little slice is 0.60% to IGE and 0.60% to VDE with 0.30% going to SLX.

The platform might be one where there is no commission for trading but even so, this seems beyond odd to me.




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