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April 2019 Optimal Portfolios are Now Available to ETFMathGuy subscribers

The 2019 optimal portfolios for the month of April are now available to subscribers of ETFMathGuy. Just log in and select your discount broker.

You can now view the current portfolios for the five discount brokers analyzed by ETFMathGuy. These portfolios cover over nearly 1,500 ETFs currently offered commission-free from Ameritrade, ETrade, Fidelity, Schwab and Vanguard.

What’s new? Full ETF names, portfolio & benchmark statistics, and portfolios for taxable and IRA accounts.

So, what’s new this month? First, we’ve added the full name of the ETF, so that subscribers don’t need to look up individual ticker symbols. For instance, the portfolios continue to favor the utility sector. So, for example, the Vanguard portfolio lists both the ticker “VPU” and its full name, “Vanguard Utilities ETF”, in the portfolio tables.

New information available on 2019 optimal portfolios from ETFMathGuy
New information available on 2019 optimal portfolios from ETFMathGuy

Second, we’ve added portfolio annualized statistics for expected return and volatility. Now, it is clear what the risk levels are set to in portfolio construction, regardless of the discount broker. For the month of April, annualized risk levels were

  • Conservative: 5.7%
  • Moderate: 8.3%
  • Aggressive: 11.0%

Third, we’ve added benchmark statistics. These measures are an excellent way to understand how the optimal portfolios match up to the broad stock, bond and cash benchmarks used by ETFMathGuy.

Last, but not least, we’ve run our portfolio construction process to include and exclude municipal bond ETFs. As mentioned in our recent post, brokers like Fidelity often restrict the use of municipal bond ETFs in IRA accounts. The summary table at the top of the current portfolios now indicate either Taxable or IRA (no munis).

We hope you find these 2019 optimal portfolios insightful and educational! If you enjoyed reading this post, we hope you will share it with others in your personal or professional network. Just click one of the icons below. And, for a limited time, subscriptions are free!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

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Commission-free Municipal Bond ETFs and a diversified portfolio

Commission-free ETFs cover a number of important asset classes, including municipal bonds. “Muni” ETFs can add an important asset class to a diversified portfolio, as returns often differ from other bond ETFs. “Muni” bond ETFs also carry the important benefit of tax-exempt interest.

“…munis are well-known for delivering tax-exempt interest”

Cinthia Murphy, ETF.com, March 18, 2019

Not surprisingly, discount brokers like Fidelity don’t permit their use in tax-advantaged retirement accounts, like IRAs. Since there are currently 46 municipal bond ETFs, most retirement accounts really don’t have access to the full list of commission-free ETFs advertised by discount brokers. The chart below summarizes the number of commission-free ETFs available. It includes the five discount brokers analyzed regularly by ETFMathGuy to develop optimal portfolios.

This chart shows that no single broker offers all 46 “muni” ETFs commission-free. But, Schwab and Fidelity offer the most at 12, followed by ETrade (11), Ameritrade (10) and Vanguard (1).

So, what does this mean for a diversified portfolio with commission-free ETFs? ETFMathGuy will be expanding portfolio construction to include both IRA accounts (that don’t include municipal bond ETFs) and taxable accounts that do.

Please be sure to check back at the beginning of April to see how municipal bond ETFs affect the diversified portfolios created by ETFMathGuy.


ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Discount brokers expand their lineup of commission-free ETFs

Last month, Fidelity and Schwab announced an expansion of the commission-free ETFs offered to their customers. We touched on this point in a recent ETFMathGuy Blog post. But, we didn’t get into much of the details of what an expanded lineup of commission-free ETFs would mean for an investor. So, in this post, we will dig into some of cost details, like expense ratios and bid-ask spreads.

Fidelity’s expanded list of commission-free ETFs for 2019

The announcement on February 12, 2019 indicated over 500 commission-free ETFs. As a current Fidelity customer, I was delighted to see the expansion. Unfortunately, as of March 16, 2019, Fidelity’s ETF screener revealed only 357 ETFs as commission-free. Note that this screen is only available to current Fidelity customers.

Fidelity's commission-free ETF list, as of March 16, 2019 reveals 357 funds available.
Fidelity’s commission-free ETF list, as of March 16, 2019.

Given the strong reputation Fidelity has in the investment community, I am sure they will follow through soon with their fully expanded lineup of more than 500 commission-free ETFs. However, it is unfortunate that Fidelity’s press release didn’t give a specific timeline for when the fund expansion will occur in its entirety, except to say “…in the coming months”.

Schwab’s expanded list of commission-free ETFs for 2019

Schwab now claims 500+ commission free ETFs. We downloaded the list of Scwhab’s expanded commission-free ETFs, and found exactly 500. So, we are not sure where the “+” comes from, but this is still quite a large lineup.

How do the expense ratios compare?

Expense ratios are important, as they are a continuous drag on returns. So, ETFs with lower expense ratios than others tracking the same index should produce higher returns. Using data obtained from ETF.com, we created charts to show a histogram of expense ratios for the commission-free ETFs from Fidelity and Schwab.

Expense ratios for Fidelity's commission-free ETFs are generally lower than those from Schwab
Expense ratios for Fidelity’s commission-free ETFs are generally lower than those from Schwab.


What does this data show us? Generally, expense ratios are lower for Fidelity’s commission-free ETFs. But, there are quite a few (about 20% or 1 out of 5) of Fidelity’s commission-free ETFs with an expense ratio between 0.4% and 0.5%. So, with a little careful selection, Fidelity offers a larger fraction of commission-free ETFs at lower expense ratios then Schwab.

How do the Bid-Ask spreads compare?

Bid-ask spreads are the costs incurred when an ETF is bought or sold, and which I discuss at length in my article “Is there a free lunch in commission-free ETFs?“. Once again, using data from ETF.com, we see that nearly 80% of the commission-free ETFs from Fidelity have spreads below 0.2%. This compares to about 74% of funds from Schwab that have spreads below 0.2%. Thus, Fidelity’s commission-free ETFs have generally lower spreads then those offered by Schwab. So, for more active investors, Fidelity’s commission-free ETFs appear to have the advantage of lower transaction costs.

Bid-ask spreads from Fidelity's commission-free ETFs are generally lower than those from Schwab.
Bid-ask spreads from Fidelity’s commission-free ETFs are generally lower than those from Schwab.

Conclusions

Competition for investor assets continues, to the benefit of investors using commission-free ETFs. In this post, we discussed some of the details of the updated lineup of commission-free ETFs now offered by Fidelity and Schwab. We find that while Schwab still offers more ETFs commission-free, Fidelity’s costs are generally lower. Lower expenses are important, as they can often lead to higher returns for funds tracking similar indices.

Thanks for reading!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

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Passive investment funds aren’t guaranteed to beat their active counterparts

In this week’s WSJ article, an excellent discussion on was given on active versus passive fund performance around the world. Fund performance over 5 and 10 year periods show that, while passive investments are superior in most of the world, there are some pockets where active management did better.

Excess performance is country specific.

As I’ve highlighted in this table, U.S. stock funds investing in small, medium and large companies consistently underperformed their passive counterparts. These results help explain why index funds, and ETFs in particular, have become so popular in recent years.

The article also highlights another sad reality of active fund investing.

“…most active managers exhibit little ability to consistently beat their peers over time. “

Derek Horstmeyer, Wall Street Journal, March 3, 2019

So, what can we learn from this article?

Passive investments using ETFs don’t guarantee excess performance over their active counterparts. But, more times than not, passive investing will outperform active investing. This fact may not always be true outside the U.S., but for investors that primarily consume with U.S. dollars, passive investments in ETFs appear to be a clear winner.

Thanks for reading!

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ETFs to Mitigate Volatility and Enhance Diversification

Last week’s Wall Street Journal noted that Charles Schwab Corp. and Fidelity Investments have doubled the number of commission-free ETFs they offer.

This is good news for individual investors! More investment options can help enhance diversification and consequently, mitigate volatility.

Here at ETFMathGuy, we build portfolios to do just that…minimize volatility using our proprietary software. In fact, our approach addresses the exact point made by Ben Johnson’s quote, director of fund research at Morningstar. In the article, he states:

“As people stop obsessing over fees, they’re coming to realize that what matters most is portfolio construction. “

Quote from Ben Johnson, Director of Fund Research at Morningstar

We hope you enjoy reading this WSJ article!

For notifications of the latest commentary of ETF investing, please join us with a free membership.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.


ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Your Retirement Nest Egg

In a recent issue of the Wall Street Journal, there was an excellent retirement article. In it, the author responded to a reader’s question “How much does my nest egg need to be?”. Your retirement nest egg is very important! So, we prepared a summary and some additional insights to consider. Our perspective is drawn, in part, from our award-winning research on retirement income planning.

retirement nest egg

Article summary by ETFMathGuy

The article starts with predicting your expenses. This is arguably a difficult task, and where many people stop. But, without this information, there is really no way to estimate the “right size” of a retirement nest egg.

In summary, the article suggests the following calculation.

  1. Start with an estimate of your expenses. A common approach to this is to assume a percent between 60-80% of expenses pre-retirement. This approach assumes that your expenses go down in retirement. That may be true for many retirees, as they no longer have mortgage payments or dependent expenses. Of course, a more precise estimate can be done.
  2. Subtract from this any guaranteed income, such as social security and after-tax pension benefits or annuities.
  3. Take this difference and multiply it by 25. In this article, they assume that a 65-year old lives until 90. This age is a conservative estimate, based on information from the Social Security Administration.

What isn’t stated in the article about your retirement nest egg

While I enjoyed this article, it made some assumptions about your retirement nest egg. For instance, the suggested value doesn’t include uncertain investment returns or inflation. The net effect of including both of these would typically give a retiree more years of retirement income. The extra income would come from a conservative investment in retirement, less inflation. Using a 4% conservative after-tax average return and 3% average inflation, this net effect would provide a 1% gain (on average) each year.

We hope you enjoyed our commentary! If you would like to see more like these, please send us a message.

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ETF Math Guy reaching out for the week: Thoughts on ETFs, markets and investing.

A Weekly Newsletter that gives you brief recommendations on ETFs, markets, and investing philosophy. Anything we are enjoying or thinking about is also fair game.

Links on ETFs this week…

This years Inside ETFs conference, is in Hollywood, Florida this week, and includes Hall of Famer Joe Montana. Not sure what Joe knows about ETFs but he knows about winning so cannot hurt to hear him speak.


Delusional ETF Trading with Sarah Newton


This podcast on Bloomberg



The number of ETF’s is extraordinary. One of the reasons we focus on the commission-free ETF’s (besides the free) is that they are also the most liquid ones. Liquidity is an issue not only for your trades but for the ETFs own survival. Legg Mason is closing 3 ETFs this week and analysts believe the number of ETF liquidations could top 1,000 in 2019.

What I’m reading (listening) to this week

The invisible Hands by Stephen Drobny

In the same format as Market Wizards by Jack Schwager, but the interviewee is anonymous. Some of the interviews are more academic in nature as compared to the Market Wizards genre which tends to be more focused on trading. The book is almost 10 years old, so some of the subjects on current events (2011 copyright) are not that relevant. The thought process is what is most relevant. How do these money managers think about markets and structure their trades accordingly.

Market Thoughts…

“A position that is going with you tends to keep going with you and your initial estimate of the move may have been conservative. A loss by overstaying a market is not one of the common mistakes. In fact, holding a profitable position a little longer will win far more often than it will lose. The big risk is closing a good position too soon.”

Amos Hostetter

Founder, Commodities Corp.

If you have thoughts or comments, please click here to reach out to us.

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2018 ETF Performance Review

Welcome to the 2018 ETF performance review.

It was a difficult year for a number of asset classes. The figure here shows that only a few ETFs had positive returns in 2018, using commission-free ETFs available from Fidelity. Based on broad indices for the stock, bond and cash asset classes, and including dividends, stocks lost 4.5%. Bonds barely broke even, returning 0.1% for the 2018 calendar year. The best performing broad market index was cash, which returned 1.7% for the year.

Fidelity-2018

Download here

Here is your 2018 ETF performance review. It was a difficult year for a number of asset classes, with only a few with positive returns.