Unless you are in a target retirement fund like Vanguard Target Retirement 2035 (maturity matching your target retirement date), you need to undertake a periodic review of your IRA (Traditional and Roth) and 401K investments. The New Year is a good time to review. While my IRA account will never rival Mitt Romney’s, I expect my legacy IRA (1/3 Roth, 2/3 Traditional) to throw off a good portion of my retirement income (2-3 times my cost of living adjusted Social Security) in just over 20 years time.
Q1 2016 @Firehorsecaper IRA portfolio & weighting: HEDJ (WisdomTree Europe Hedged Equity ETF) 17%, DXJ (WisdomTree Japan Hedged Equity ETF) 16%, HDV (iShares High Dividend ETF, 3.8% yield) 16%, QQEW (NASDAQ 100 equal weighted ETF) 5%, PFF (iShares U.S. Preferred Shares ETF, 5.9% yield) 16%, BBN (Blackrock Taxable Municipal Bond Fund, closed end fund, 7.9% yield) 16%, DSL (DoubleLine Income Solutions Fund closed end fund, 10% yield) 9%, SLRC (Solar Capital Ltd., a high yielding BDC, 9% yield) 5%. Overall asset allocation 54% equity / 46% “alternative” fixed income.
ETF’s have taken off in popularity over the last few years and fees are typically much lower than comparable mutual funds. Many expect long-only mutual funds to go the way of the Dodo bird, over time. “Smart-beta” has been the a fast growing ETF sector and now stands at $400bln with traditional index ETFs at $1.8tln. Smart beta ETFs have attracted $65bln in assets in 2015 with a whopping $18bln (28%) allocated to Wisdom Tree’s DXJ (currency hedge Japan) and HEDJ (currency hedged Europe).
The largest ETF in the “Traditional”category is State Street’s SPY with $183bln in AUM. Perhaps more surprising than its size is the average hold period of less than a week. VOO is Vanguard’s S&P ETF offering and at $40bln it is growing for 2 reasons, i) Cost, 5bp vs 9bp for SPY and ii) Structure, SPY is a UIT (Unit Investment Trust) meaning units can not be re-hypothecated, whereas VOO is an ETF. Securities lending fees are passed through to the ETF holder and VOO is more capital efficient for institutional accounts as they can rely on cross-product netting for margining purposes with their PB (Prime Broker).
ETFs are increasingly being used by institutional accounts for asset allocation purposes. Good Harbor Financial LLC is one of the biggest ETF portfolio managers in the US which in 2014 moved to semi-monthly re-balancing from monthly to mask their often multi-billion dollar re-allocations between equity and fixed income ETFs (5-10bln across half a dozen ETFs).
The analytics for the DIY ETF investor have never been better in terms of diversity or cost. The one consistent criticism of DIY is that the steady hand at the wheel often heads for a puke over the side when the waves measure a multiple of your boat. For those willing to monitor more actively, there are sites like etfreplay.com (warning: more addictive than Minecraft for adults) which allows you to build, back-test and manage your own ETF driven investment portfolio. Monthly re-balancing ideally, but if you are in the best 4 of 12 ETFs you will rarely be trading more than 1-2 ETFs per month. Moving average filters (200 day moving average, or others of your choosing) direct you to ETF products like SHY (1-3 year Treasury ETF) when all hell breaks loose. There is also etfdb.com which has both a free and paid version for research purposes. Note: Not personally affiliated with either, just a happy subscriber, as I am to IBC’s Exodus service.
Speculative trading is fun and can be lucrative, but most are not wired to handle the inevitable drawdowns inherent in the trading strategy for all your chips. Prudent asset allocation and the power of compounding are important drivers for your very long term investment goals. It is the hamburger versus steak trade, or for the vegans the iceberg lettuce versus arugula trade. JCG
Note: Citizen of the world asset allocation. A US based investor would typically exhibit more home country bias and have the equity component more USA weighted. The “go to” funds in the Vanguard family would include VTI (Total US Market ETF), VNQ (US REIT Index) and VYM (High Dividend Yield ETF) with upwards of 1/3 of overall portfolio weighting in VTI as a core holding.If you enjoy the content at iBankCoin, please follow us on Twitter