Same Strategy, Different Implementation

Before today's post, Stockholm is very cool, literally and figuratively. I am in a dark gamers type place where a bunch of kids are swearing at each other. We saw ten minutes of Swedish Tour de France coverage which was a trip.

Not a huge shock that the market is working off a lot of the super rally from the other day.

More later.

I stumbled across an all ETF portfolio managed by an RIA firm. From what I could tell I think the firm is a top down manager, which is what I am, but they seem to use seven or eight ETFs for a full portfolio which is a different method of implementation than what I do.

I looked at their website and specific funds used is not disclosed but the categories are large cap, small cap, mid cap, international, REITs, two types of bonds and cash (which is probably just cash and not an ETF). Given that they use so few ETFs I doubt any part of the equity allocation gets more than two ETFs, with most getting only one. They clearly focus on allocating cap size but I was not able to find whether the try to capture style in any way shape or form.

By style I mean growth or value. For example the small cap allocation could be broad (like IWM) or small cap growth or small cap value.

With regard to foreign I am not sure if they use just a broad foreign ETF or if they include emerging markets. The most current allocation for a moderate investor with an intermediate time horizon breaks down as follows;

20% Large Cap
20% Mid Cap
10% Small Cap
10% International
18% REITs
19% Bonds
3% Cash

The returns for their approach seem to very inline with the market. They are not adding a lot in the way of return, nominally speaking, but on a risk adjusted basis, factoring in that they have close to 20% in bonds, there probably is value being added.

Clearly this approach to portfolio construction is valid and may even be ideal for people not wanting to make a career out of managing their portfolios except this is being offered by an RIA, so it is his career.

I am on board with the top down idea that de-emphasizes stock picking. There is a whole big universe of investment products, for the do-it-yourselfer or RIA, that might be better than owning a couple of cap-size ETFs. The above method potentially ignores dividends, sectors, single countries, almost every aspect of the fixed income market and I have no idea if they use commodity ETFs.

Spreading out over more than eight ETFs may not add any more performance (although I believe that it does) but it can reduce volatility. If you lag the market by 50 basis points a year forever with only half the volatility (an extreme, static example) you'd be in very good shape.

A part of the job, whether you do this for yourself or manage money for others, is looking for better mouse traps. Occasionally a new ETF or CEF is better than what you are currently using. The time needed for this is far from unreasonable.

Trying to explore new products is major theme of this site and I think it is very interesting.