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Mar 8, 2007 11:21 pm

[quote=theironhorse]This is what he wanted me to “find” for him.  Barclays
International Index Fund. 

[/quote]



I have no clue what this is, but AFAIK Barclay’s also runs traditional mutual funds.


[quote]I cannot find it anywhere-but was
also planning to recommend CWI as a substitue.  If the thing is
suppose to mirror the index, why not just buy the index?[/quote]


CWI is a fine choice, 1/3rd CWI
means you should split the remaining between domestic and fixed income.
For ease of compounding, I’d recomend VG’s/Fidelities bond index funds.

Mar 9, 2007 2:13 am

[quote=AllREIT] [quote=mikebutler222]Having said that, I disagree with the simplistic 1/3, 1/3, 1/3 ETF strategy presented earlier. I like ETFs and use them often, but making the same mistakes with ETFs that are often made with mutual funds (being slap-dash, one size fits all) isn’t a good idea, imho.<O:P></O:P>

[/quote]

What didn't you like about an allocation to the entire planet in market proportions and an 33% allocation to US investment grade bonds?


[/quote]

It's not a bad start, believe me, and I suppose it wouldn't be a bad stand-alone for the smallest of accounts, but it's a pretty blunt tool going 1/3, 1/3, 1/3. Also, if I were the client I’d be left wondering just what value my advisor who bought 3 ETFs brought to the table.

It's one size fits all and there's nothing that says 1/3 bonds, much less all Inv grade Corps of intermediate maturities is right for everyone. Where’s the high yield? Where’s the varying maturities? Any converts in there? As to the domestic component, I'd prefer to break it down by value/growth and by cap size. That single ETF is underweighted in small and mid-cap for most of my clients.

For the international, I'm really not that familiar with CWI, but what I would be looking for is the value/growth split and the weighting between developed and emerging markets. As with the others, if I could break it down further, I could take some tactical positions.

FWIW, when I look at ETFs, in addition to expenses, I like to see real trading volume (for smaller spreads) and I’d like to be able to write calls. A question; when Vanguard first rolled out their ETFs, some weren’t eligible for dividend reinvestment (something else I look for) are they all now?

Mar 9, 2007 2:18 am

Well said, MB…

Mar 9, 2007 2:39 am

[quote=mikebutler222][quote=AllREIT] What didn’t you like about an
allocation to the entire planet in market proportions and an 33%
allocation to US investment grade bonds?[/quote]

It's not a bad start, believe me, and I suppose it wouldn't be a bad stand-alone for the smallest of accounts, but it's a pretty blunt tool going 1/3, 1/3, 1/3. Also, if I were the client I’d be left wondering just what value my advisor who bought 3 ETFs brought to the table.[/quote]

This is where you have to decide on clients you work with. Some clients accept the right choice, and they understand that what they are paying for is the disicipline to make the right choice. Other clients want bells and whistles, with lots of moving parts to get their fingers caught in.

That portfolio has an expense ratio of 20bp, I think it would very hard to beat that using active management (after accounting for small/value exposure). A portfolio like this has incredible theoretical elegance.

[quote]It's one size fits all and there's nothing that says 1/3 bonds, much less all Inv grade Corps of intermediate maturities is right for everyone.[/quote]

AGG is the entire nominal US investment grade bond universe, as such its mostly Treasuries and Agency MBS. It excludes TIPS.

[quotes]Where’s the high yield? Where’s the varying maturities? Any converts in there?[/quotes]

Assuming credit risk is properly priced, there is zero excess return from credit risk. I'm not sure if converts give you anything a 80/20 bond/stock portfolio wouldn't. Ultimately the embeded option value + nominal interest rate == traditional interest rate. So converts shouldn't have total return in excess of some combination of the equity market + normal bond market.

AGG's durration is about 5 years and that doesn't budge much. Under most Y/c conditions there is no risk adjusted excess return for going out in maturities.

[quote]As to the domestic component, I'd prefer to break it down by value/growth and by cap size. That single ETF is underweighted in small and mid-cap for most of my clients.[/quote]

It is the market. Small/mid just arent big players in the scheme of things.

Actully I agree with that, normally I would add overweights to smid+microcap in most clients portfolio's as well as skew the entire portfolio towards value. However I wanted to keep this very simple, since we are talking about a SIMPLE IRA.

[quote]For the international, I'm really not that familiar with CWI, but what I would be looking for is the value/growth split and the weighting between developed and emerging markets. As with the others, if I could break it down further, I could take some tactical positions.[/quote]

CWI is the MSCI All-country world x-US Index ETF (35bp). It has all countries with acessable stock markets; both developed and emerging. When combined 50:50 with US Broad Market index, you have the MSCI World Index, i.e the entire planet's equity market.

Unless you travel to distant planets you will not find a better equity index.

[quote]FWIW, when I look at ETFs, in addition to expenses, I like to see real trading volume (for smaller spreads) and I’d like to be able to write calls. A question; when Vanguard first rolled out their ETFs, some weren’t eligible for dividend reinvestment (something else I look for) are they all now?[/quote]

Dividend reinvestment is function of the underlying B/D platform. Someone like FolioFN/Sharebuilder offers it to everyone.

Mar 9, 2007 1:25 pm
AllREIT:

[quote=mikebutler222][quote=AllREIT] What didn’t you like about an allocation to the entire planet in market proportions and an 33% allocation to US investment grade bonds?

It's not a bad start, believe me, and I suppose it wouldn't be a bad stand-alone for the smallest of accounts, but it's a pretty blunt tool going 1/3, 1/3, 1/3. Also, if I were the client I’d be left wondering just what value my advisor who bought 3 ETFs brought to the table.[/quote]

This is where you have to decide on clients you work with. Some clients accept the right choice, and they understand that what they are paying for is the disicipline to make the right choice. Other clients want bells and whistles, with lots of moving parts to get their fingers caught in.

You're there to make sure fingers don't get caught, and I presume we're all professional enough to be able to handle more than three ETFs.

That portfolio has an expense ratio of 20bp, I think it would very hard to beat that using active management (after accounting for small/value exposure). A portfolio like this has incredible theoretical elegance.

I didn't mention active management and I remain unconvinced of the elegance of 1/3, 1/3, 1/3. By that measure the cookie cutters in every kitchen in the country are modern art.



[quote]It's one size fits all and there's nothing that says 1/3 bonds, much less all Inv grade Corps of intermediate maturities is right for everyone.[/quote]

AGG is the entire nominal US investment grade bond universe, as such its mostly Treasuries and Agency MBS. It excludes TIPS.

It's a high quality corp index with intermediate maturities. There's an entire fixed income world that's left out. It also, unlike the real bonds themselves, makes no promise of return of principle at maturity.

[quotes]Where’s the high yield? Where’s the varying maturities? Any converts in there?[/quotes]

Assuming credit risk is properly priced, there is zero excess return from credit risk.

You realize there's an entire credit market (and stock market for that matter) based on the fact that "proper pricing" is imaginary in the short term, right?

So converts shouldn't have total return in excess of some combination of the equity market + normal bond market.

Again, perhaps in some ultra-long time frame that's true, it isn't in shorter periods or there'd be no market in them.

[quote]As to the domestic component, I'd prefer to break it down by value/growth and by cap size. That single ETF is underweighted in small and mid-cap for most of my clients.[/quote]

It is the market. Small/mid just arent big players in the scheme of things.

I don't buy "the market" and I want a better representation of small and mid cap companies than this large/super large blend weighted ETF gives me. Again, those tactical opportunities...

Actully I agree with that, normally I would add overweights to smid+microcap in most clients portfolio's as well as skew the entire portfolio towards value. However I wanted to keep this very simple, since we are talking about a SIMPLE IRA.

I can see the point if we're talking about a time pool of money, otherwise the term "simple" doesn't mean the invetsments within it have to be.

[quote]For the international, I'm really not that familiar with CWI, but what I would be looking for is the value/growth split and the weighting between developed and emerging markets. As with the others, if I could break it down further, I could take some tactical positions.[/quote]

CWI is the MSCI All-country world x-US Index ETF (35bp). It has all countries with acessable stock markets; both developed and emerging. When combined 50:50 with US Broad Market index, you have the MSCI World Index, i.e the entire planet's equity market.

Again, inherient in your approach is the inability, or perhaps the lack of desire, to mae tactical moves. That's impossible in a single international ETF.

Unless you travel to distant planets you will not find a better equity index.

No offense, but I remain unconvinced by the nifty marketing line. I don't think I even have to leave my desk to find tactical opportunities that can't be taken advantage of in such an approach.

[quote]FWIW, when I look at ETFs, in addition to expenses, I like to see real trading volume (for smaller spreads) and I’d like to be able to write calls. A question; when Vanguard first rolled out their ETFs, some weren’t eligible for dividend reinvestment (something else I look for) are they all now?[/quote]

Dividend reinvestment is function of the underlying B/D platform. Someone like FolioFN/Sharebuilder offers it to everyone.

You could be right about that, but it's curious that it's only been with the Vanguard ETFs that I've encountered an inability to use dividend reinvestment on a handle of their offerings.

[/quote]
Mar 9, 2007 4:49 pm

[quote=Indyone]Well said, MB...[/quote]

Thanks.

Mar 9, 2007 7:43 pm

[quote=mikebutler222]

This is where you have to decide on clients you work with. Some clients accept the right choice, and they understand that what they are paying for is the disicipline to make the right choice. Other clients want bells and whistles, with lots of moving parts to get their fingers caught in.

You're there to make sure fingers don't get caught, and I presume we're all professional enough to be able to handle more than three ETFs. [/quote]

We may very well be. I'm like a zen gardener. 

Other people like to think, "I participate in something bigger than myself because I own Growth Fund of America"

[quote]It's one size fits all and there's nothing that says 1/3 bonds, much less all Inv grade Corps of intermediate maturities is right for everyone.[/quote]

AGG is the entire nominal US investment grade bond universe, as such its mostly Treasuries and Agency MBS. It excludes TIPS.

It's a high quality corp index with intermediate maturities. There's an entire fixed income world that's left out. It also, unlike the real bonds themselves, makes no promise of return of principle at maturity.[/quote]

Get your facts first, then you can distort them as you please --- Mark Twain

As far as I can tell you are confusing AGG with LQD.

http://www.ishares.com/fund_info/detail.jhtml?symbol=AGG&amp ;qt=AGG

The AGG is the Lehman Aggregate, which is the benchmark for total bond market funds like VG/Fidelities Total Bond Funds. While the ETF itself (like any mutual fund) has no garuntee's, you show up with 50,000 shares and you can redeem them inkind.

[quote]As to the domestic component, I'd prefer to break it down by value/growth and by cap size. That single ETF is underweighted in small and mid-cap for most of my clients.[/quote]

It is the market. Small/mid just arent big players in the scheme of things.

I don't buy "the market" and I want a better representation of small and mid cap companies than this large/super large blend weighted ETF gives me. Again, those tactical opportunities...[quote]

It's not a super/large weighted ETF. It's a market weighted ETF.

There is nothing wrong with more exposure to s/mid or value stocks, But you take on more risk for doing so.

[quote]Again, inherient in your approach is the inability, or perhaps the lack of desire, to mae tactical moves. That's impossible in a single international ETF.

Unless you travel to distant planets you will not find a better equity index.

No offense, but I remain unconvinced by the nifty marketing line. I don't think I even have to leave my desk to find tactical opportunities that can't be taken advantage of in such an approach.[/quote]

The grand history of people making tactical moves in the markets is very poor. If upwards of 80% of portfolio returns come from asset allocation, in my mind it would make sense to focus on that.

It's going to be very hard to beat simple two phase portfolio of the earth's equity market + Investment grade bonds in the appropriate allocations.

Of course there are many "improvements" you could make to this portfolio, and that includes the obvious step of adjusting the bond portion to clients risk tolerance. The biggest and most obvious being to include an extra allocation to TIPS. Subject to risk tolerance you could fool around with the equity portion.

Mar 9, 2007 9:00 pm

[quote=AllREIT] [quote=mikebutler222] <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

This is where you have to decide on clients you work with. Some clients accept the right choice, and they understand that what they are paying for is the disicipline to make the right choice. Other clients want bells and whistles, with lots of moving parts to get their fingers caught in.

You're there to make sure fingers don't get caught, and I presume we're all professional enough to be able to handle more than three ETFs. [/quote]

We may very well be. I'm like a zen gardener. 

How much do you get paid to sleep in the garden? Just kidding....

Other people like to think, "I participate in something bigger than myself because I own Growth Fund of America"

I don't know people like that, much less do have any clients like that. I do have clients who expect more from me than 1/3, 1/3, 1/3, with no tailoring to their specific circumstances and no efforts to beat the blended index with tactical moves.

[quote]It's one size fits all and there's nothing that says 1/3 bonds, much less all Inv grade Corps of intermediate maturities is right for everyone.[/quote]

AGG is the entire nominal <?:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />US investment grade bond universe, as such its mostly Treasuries and Agency MBS. It excludes TIPS.

It's a high quality corp index with intermediate maturities. There's an entire fixed income world that's left out. It also, unlike the real bonds themselves, makes no promise of return of principle at maturity.[/quote]

Get your facts first, then you can distort them as you please --- Mark Twain

As far as I can tell you are confusing AGG with LQD.

You're right, AGG is only about 20% corps. The criticisms about limited flexibility still apply. Why would I want to always be in intermediate maturities? Why would I want to be so light on corps in some economic environments?

 

http://www.ishares.com/fund_info/detail.jhtml?symbol=AGG&amp ; ;qt=AGG

The AGG is the Lehman Aggregate, which is the benchmark for total bond market funds like VG/Fidelities Total Bond Funds. While the ETF itself (like any mutual fund) has no garuntee's, you show up with 50,000 shares and you can redeem them inkind.

If you have a 1.5MM account in three ETFs, well....Secondly, if you have 500M to but in fixed income and you put it all in a single ETF, well…the same applies.

Sacrificing the safety aspect of assured maturity dates when you have the available money to diversify while  holding individual bonds doesn’t make sense to me.


 

[quote]As to the domestic component, I'd prefer to break it down by value/growth and by cap size. That single ETF is underweighted in small and mid-cap for most of my clients.[/quote]

It is the market. Small/mid just arent big players in the scheme of things.

I don't buy "the market" and I want a better representation of small and mid cap companies than this large/super large blend weighted ETF gives me. Again, those tactical opportunities...[quote]

It's not a super/large weighted ETF. It's a market weighted ETF.

"Market weighted" meaning that in reality it is 76% "super caps" and large caps, 19 % Mid and 9% small. I’d like to be flexible about that distribution and I’d like control as to the style aspects.


 There is nothing wrong with more exposure to s/mid or value stocks, But you take on more risk for doing so.

And you’re paid for it. We’ve all read the book too. 'Been in the business all day now.

[quote]Again, inherient in your approach is the inability, or perhaps the lack of desire, to make tactical moves. That's impossible in a single international ETF.

Unless you travel to distant planets you will not find a better equity index.

No offense, but I remain unconvinced by the nifty marketing line. I don't think I even have to leave my desk to find tactical opportunities that can't be taken advantage of in such an approach.[/quote]

The grand history of people making tactical moves in the markets is very poor. If upwards of 80% of portfolio returns come from asset allocation, in my mind it would make sense to focus on that.

The grand history is that 50% of the population, in any representative sample group, is below average. What you’re doing is assuring yourself average returns. You can still get that 80% related to AA, and pick up the coveted alpha as well.

It's going to be very hard to beat simple two phase portfolio of the earth's equity market + Investment grade bonds in the appropriate allocations.

Actually it isn’t difficult at all. As an example, a portfolio that had its large cap percentage leaning towards a value style outperformed one equally weighted as yours for the last six year handily and while lowering volatility. A portfolio that had its fixed income allocation leaning towards short/intermediate maturities the past five years  outperformed the broader index.

In both cases it didn’t take some crystal ball on the markets, or aggressive posturing, just a conservative following of trends.

Of course there are many "improvements" you could make to this portfolio, and that includes the obvious step of adjusting the bond portion to clients risk tolerance.

That would be my point when I refer to the clumsy nature of 1/3, 1/3, 1/3. It should be a requirement of a professional to adjust not just the bond portfolio, but the entire portfolio, to the client’s risk tolerance AND their goals.

The biggest and most obvious being to include an extra allocation to TIPS. Subject to risk tolerance you could fool around with the equity portion.

[/quote]

I’m not the fan of TIPs that you are, either. They’re fine in a  rising interest rate environment, in anything else that hike inflation based kick is non-exisitant and they have a low current yield. To avoid the akward nature of the taxation of them, you have to use a fund or ETF and give up the maturity date assurance.

What this conversation really boils down to is how strict one is in adherence and belief in MPT. On that continuum you’re more of an adherent than I am, and many would consider me a strong believer. I believe, as you’ve heard before, that in the long term the market is a weighting mechanism (as MPT asserts), in the shorter term it’s a voting mechanism.

Mar 9, 2007 10:08 pm

Oh man here we go with the colors again.  Where’s BondGuy, we need some blue and green to round out our color wheel…

Mar 10, 2007 7:53 am

[quote=joedabrkr]Oh man here we go with the colors again.  Where’s
BondGuy, we need some blue and green to round out our color wheel…
[/quote]



In my old age, I am getting too
arthritic to explain that alpha tends to vanish after you pull out
size/value effects. Maybe that’s why like passive portfolio’s so much. Just sit back on the beach, drink your Gin &tonic’s, watch the tide roll in and out, and collect your dividends.



Given that 80% of active money
managers underperform the S&P 500, doing nothing is better than
whatever it is everyone else is doing.

Mar 10, 2007 12:27 pm

That portfolio has an expense ratio of 20bp, I think it would very hard to beat that using active management (after accounting for small/value exposure).

An expese ratio that doesn't include your fee doesn't have much meaning.  ie. An "A" share MF will cost significantly less than your portfolio once your fee is included...especially if the account is not small.

Given that 80% of active money managers underperform the S&P 500, doing nothing is better than whatever it is everyone else is doing.

I've never understood the logic behind this argument.  This would only make sense if we had to choose funds by blindly picking out of a hat.  Couldn't someone who is a fan of American Funds say, "This fund family has outperformed more than 80% of active money managers so investing in American Funds is better than doing whatever everybody else is doing."

Also, your quote ignores the effect of the advisor fee.  A $100,000 lump sum investment growing at 9% for 30 years loses 32% of it's value if the advisor charges 1%.  In other words, a fee based account invested passively is GUARANTEED to severely underperform its respective index.

Do not take my post to be an argument in favor of "A" shares.  It's more of a devil's advocate type of post.