Category: Periodic commentary

ETFMathGuy provides periodic commentary on risks and opportunities of investing in Exchange Traded Funds (ETFs), including recent market trends.

ETFMathGuy is a subscription based education service providing commission-free ETF optimal portfolios. We offer individual investors insights into building optimal portfolios.  Each month, we analyze hundreds of commission-free ETFs available to individual investors.  Then, we build optimal portfolios based on a variety of risk tolerances and current market conditions using a quantitative methodology.

We hope these periodic commentaries on ETFs help you improve your investment knowledge!

Posted on

January 2020 portfolios had a strong start

With the first month of the year now passed, we reflect in this post on the returns of our January premium portfolios. With over 2,000 ETFs analyzed, we expected greater opportunity for growth from a diversified portfolio. This past month of January 2020, we realized this opportunity.

The premium portfolios

At the close of Monday, January 6th, we purchased two optimal portfolios. The first used a taxable account at a moderate risk level. Then, the second used a Roth IRA using an aggressive risk level. We describe moderate and aggressive risk portfolios in our portfolio construction process.

These portfolios, published on ETFMathGuy on Sunday, January 5th, appear below.

The January ETFMathGuy moderate risk portfolio for taxable accounts.
The January ETFMathGuy moderate risk portfolio for taxable accounts.
The January ETFMathGuy aggressive risk portfolio for IRA accounts.
The January ETFMathGuy aggressive risk portfolio for IRA accounts.

The returns from the premium portfolios

Thus, there were 19 daily returns, from January 7th through January 31st. Over that time, the moderate portfolio returned 4.6% and the aggressive portfolio returned 5.72%. Over that same time period, stocks (measured by the S&P 500 ETF, ticker IVV) returned -0.6% and bonds (measured by the Barclay’s Aggregate Bond ETF, ticker AGG) returned 1.5%. Therefore, these results are consistent with previous academic research.

“The conclusion of the research clearly advances the case of ETFs. Individual investors cannot afford to ignore these potential portfolio enhancing instruments. This is in part because of the fact that some of the ETF-only strategies are made possible by providing exposure to asset classes previously virtually unavailable…”

DiLellio and Stanley (2011), “ETF trading strategies to enhance client wealth maximization”, Financial Services Review. Vol 20, pp. 145-163.

In conclusion, the January 2020 returns from the premium portfolios exceeded their benchmarks. But, will this excess return persist? Please watch for future posts which will continue tracking the performance of the ETFMathGuy premium portfolios in 2020.

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.
Posted on

2019 ETF Returns

Where will the global economy take us in 2020? To consider this question, we thought it would be helpful to review 2019 ETF returns. So, we devoted this post to highlight the 2019 returns among the major ETF categories.

So many ETFs to pick from…

In 2019, there were over 2,000 ETFs available to investors. Unfortunately, thinly traded and limited return history ETFs represented many of these. Thus, to focus on only the most major asset classes represented by ETFs, we chose to only review the 59 ETFs currently managed by Vanguard. Then, we broke the list into two obvious groups.

  1. Equity or stock-based ETFs
  2. Fixed income or bond-based ETFs

Equity ETF Returns

Vanguard offered 41 equity-based ETFs in 2019. Including dividends, the image below sorts their total returns for 2019.

Total Returns of Vanguard's Equity ETFs in 2019
Total Returns of Vanguard’s Equity ETFs in 2019

As this image clearly shows, our benchmark S&P 500 index ETF had a total return of 31.4%, making for an excellent year. In fact, it was the best annual return for this ETF since its inception in 2010.

But, there were other broad-based equity ETFs that did even better. The best performing one was focused on information technology. Other top performers included growth ETFs distributed across, small-cap, mid-cap and mega cap indices. And, a newer investment trend we’ve written about before also emerged as a leader: Environmental, Social and Corporate Governance (ESG) in the U.S.

Returns from Information Technology Firms led the markets in 2019
Returns from Information Technology Firms led the markets in 2019

On the other end of the return spectrum, the energy sector lagged the S&P 500 by the greatest amount. Other noteworthy groups of ETFs tracked by Vanguard that also lagged the S&P 500 were as follows.

  1. Value and dividend-oriented ETFs
  2. International, both developed countries and emerging markets
  3. Many industry sectors (real estate, industrials, consumer discretionary and staples, utilities, materials health care)

Fixed Income ETF Returns

Fixed income ETFs also had a very good year in 2019. Using the total bond market ETF as a benchmark, fixed income ETFs returned 8.8%

Total Returns of Vanguard's Fixed Income ETFs in 2019
Total Returns of Vanguard’s Fixed Income ETFs in 2019

The leaders in the bond market in 2019 were those that held riskier bonds, like those from corporations vs. the U.S. government. Fixed income ETFs with longer maturities also led the bond markets in 2019.

Conclusions on 2019 ETF returns

We hope you found this review of stock and bond ETF returns from 2019 helpful. Interested in using the Vanguard ETFs in a 2020 diversified portfolio? If so, please check out our Free Optimal Portfolios for 2020 for some ideas. Or, if you are seeking a diversified portfolio that analyzes over 2,000 ETFs (including those from Vanguard), please review our Premium Optimal Portfolios for 2020.

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.
Posted on

Happy New Year from ETFMathGuy!

Happy New Year! To start this year, we made some significant updates to our services. Hopefully, you will find these updates useful as you evaluate your ETF investments.

New Menu Options To Access Optimal Portfolios for 2020

We have reorganized the menu at the top of ETFMathGuy.com to provide access to the 2019 and 2020 portfolios. You can still find them under the heading “Current Portfolios“.

We have also created two options for the 2020 portfolios. The first option is labeled “Free Optimal Portfolios for 2020”, and is accessible to all free subscribers of ETFMathGuy. It provides optimal portfolios generated each month using only Vanguard ETFs. So, please check out the January portfolios posted earlier today, and also now available to download for offline review. These portfolios are an excellent way to minimize expense ratios associated with ETFs, while keeping the number of ETFs in a portfolio to a minimum.

New menu options to access the 2019 and 2020 Optimal Portfolios
New menu options to access the 2019 and 2020 Optimal Portfolios

The other option is the “Premium Optimal Portfolios for 2020“. This option takes advantage of other parts of the financial market that Vanguard ETFs don’t reach, and analyzes over 2,000 commission-free ETFs. As a result, these portfolios are only accessible to premium subscribers. Like the free portfolios, they are also available for download.

All 2020 portfolios are available to download as PDF files.
All 2020 portfolios are now available to download as PDF files.

New Subscription Options

If you are interested in accessing the premium portfolios, we provide two payment options. As shown on the “Join Us” page, you can select either monthly or annual billing. Also, we accept credit card payments through our payment processor Stripe.

Price: $9.95 / month

Want to save over 30% on your monthly subscription each year? Then, consider paying once per year!

Price: $79.95 / year

Don’t want to upgrade your subscription? Well, that is not a problem. You can continue receiving our periodic commentary, access the free portfolios, and continue to test out our new interactive retirement income calculator.

Wishing you a wonderful 2020!

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.

Posted on

Retirement Calculator by ETFMathGuy

Seasons greetings to all! We hope this post finds you well. We are happy to introduce a new and evolving feature available to ETFMathGuy subscribers: a new Retirement Calculator!

Retirement Calculator

You may have noticed a new menu option when logging into ETFMathGuy.com labeled “Retirement Calculator”. Please be sure to log-in to our site to access this interactive calculator. If you don’t recall your password, it can be reset here. You also may need to refresh the page containing the calculator.

A new retirement calculator to help you better understand the feasibility of your retirement income.
A new retirement calculator to help you better understand the feasibility of your retirement income.

Another Retirement Calculator?

There are certainly many retirement calculators available online, either free, as part of your brokerage account, or by subscription. I have been using the Fidelity Retirement Income planner for some time, which is free to Fidelity account holders. While there are similarities between our retirement calculator and others, here are a few of the features our retirement income planner includes.

  1. We assume qualified stock dividends and non-qualified bond dividends. Some planning tools tax stock and bond dividends the same. So, we made the assumption that stock and bond investments in a taxable brokerage account hold ETFs like the iShares Core S&P 500 ETF (ticker IVV) and the iShares Core U.S. Aggregate Bond ETF (ticker AGG).
  2. We assume taxable account withdrawals trigger only long-term capital gains taxes. Some planning tools include all taxable account withdrawals as part of ordinary income, which only occurs for capital gains in investments held for less than one year.
  3. We model capital gains taxes and qualified dividends at either the 0%, 15% and 20% rates, with income levels based on taxable income for the current tax year. Some planning tools either exclude taxation of these sources of retirement income, or tax them all at the 15% rate.

Questions or feature requests

We encourage you to try out our new calculator, which also provides more detailed information on how it models retirement income and taxes. We also would love to hear about features you would like to be included in the calculator as its development continues.

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.
Posted on

December 2019 optimal portfolios and ETF industry consolidation

The December 2019 optimal portfolios are now available to ETFMathGuy subscribers. So, please log in and select your discount broker to see the effect of current market conditions on your optimal portfolios. In this post, we will also discuss some consolidation in the ETF industry and how it may affect your brokerage accounts.

ETFs can be a low-cost way to invest in the stock and bond markets. But, consolidation is occurring with ETF brokers.
Source: WSJ.com

Schwab announces its purchase of TD Ameritrade

The announcement of a consolidation in the discount brokerage industry occurred in November. The $0 commission fee war started recently likely contributed to this industry change . This news is especially problematic for ETrade, who manages 5.3 million brokerage accounts. By comparison, Fidelity has nearly 30 million brokerage accounts and the combined Schwab and Ameritrade would have 24 million. Given that discount brokers increase profitability with the scale of their operations, ETrade could struggle in the coming years. Or, put another way, commission-free ETFs are reducing revenue of discount brokers. There is interest at ETrade for an acquisition, but no firms have stepped forward yet.

“If you put your hand up and say you’re on sale, and nobody shows up, that can be seen as a negative,”

Devin Ryan, an analyst at JMP Securities, discussing ETrade’s interest in being acquired.

Should you switch to a different broker?

A recent review of online brokers put ETrade in 4th place. There was a 3-way tie for 1st place between Schwab, Ameritrade and Fidelity. Vanguard appeared in 5th place. Our opinion is that the subtle differences between brokers may be indistinguishable to many retail investors. We believe costs should be paramount as they create a drag on investment returns. For this reason, we recommend that if you are already with one of these five brokers, it probably isn’t worth the time to make a change. However, you may wish to revisit this decision if industry consolidation continues and fees change.

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.
Posted on

More ETFs trading commission-free

The year of 2019 has seen a dramatic shift in the costs to trade ETFs. There are now four discount brokers who offer nearly all ETFs commission-free, including Ameritrade, Fidelity, Schwab and Vanguard. But, as we’ve discussed previously, investment returns depend on another cost too. We discuss this other cost here, and suggest alternatives to help minimize it.

How many commission-free ETFs are there now?

There are many ETFs available today covering broad and narrow aspects of the market. According to my favorite screener at ETF.com, and excluding leveraged and inverse ETFs, there are 2,052. That is a lot of choices for any investor to consider. Here at ETFMathGuy, we prefer optimal portfolio construction. That is, selecting ETFs that compliment one another in a diversified portfolio. Prior to this construction, we also screen ETFs to ensure each portfolio avoids ETFs with (i) low volumes and (ii) short track records.

The other cost: the bid-ask spread

The hidden cost of buying and selling an ETF is the bid-ask spread. So, investors should conduct some due diligence to reduce this cost whenever possible. Based on the latest data from ETF.com, we constructed the chart below. As it shows, thinly traded ETFs or ETFs that have less-liquid underlying securities still persist in about 10% of ETFs available today. Fortunately, a little more than half of ETFs have a bid-ask spread under 0.15%.

Number of ETFs and their bid-ask spreads, as of November 2019.
Source: ETF.com’s ETF Screener & Database

Conclusions

Commission-free ETFs are good news, as they reduce the cost of investing in ETFs. However, care should be taken to avoid other costs, like the bid-ask spread. To help avoid this cost, investors should seek more liquid ETFs with lower bid-ask spreads, or find ways to trade less frequently. In any case, commission-free doesn’t mean there are no transaction costs, and investors would be wise to choose their ETFs with care.

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.
Posted on

November 2019 Portfolios and a Thank You to our Subscribers

The November 2019 optimal portfolios are now available to ETFMathGuy subscribers. So, please log in and select your discount broker to see the effect of current market conditions on your optimal portfolios. In this post, we will also discuss some changes to ETFMathGuy.com for 2020, and a special offer for current subscribers.

Changes coming to ETFMathGuy.com for 2020

2019 has been a good year for ETFMathGuy.com. We have seen significant growth of investors interested in optimal portfolios using ETFs. Our subscriber base has also grown substantially, but so has our cost of running this service. So, beginning in January of 2020, we will be making changes to our subscription program. Subscription pricing will become as follows:

$9.95 / month or $79.95 / year for individuals

If you are a financial adviser and wish to continue using our portfolios to help guide investment decisions for your clients, please contact us for institutional pricing. This pricing will apply to portfolios we produce each month from the following brokers’ commission-free ETFs: Ameritrade, ETrade, Fidelity and Schwab

As a “thank you” for anyone who starts a free subscription before the end of the year, will will provide discounted subscription fees. So, please share this opportunity with other like-minded ETF investors you may know, and stay tuned for more details!

Continuing benefits of a free subscription

We realize that some of you may not want to pay for a subscription. So, for those who don’t upgrade, your free subscription will continue. Your free subscription will include access to the Vanguard optimal portfolios. It will also include email updates on our periodic commentary on market conditions and trends in ETFs.

Vanguard offers commission-free ETFs.
Optimal portfolios using Vanguard Commission-free ETFs will continue to be available without a monthly or annual subscription fee.

Thank you all for an amazing first year of ETFMathGuy!

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.
Posted on

Is direct indexing better than buying an ETF?

Direct indexing may be gaining popularity soon, thanks to a continued fee war between several large brokerages. Both Schwab and Ameritrade recently announced commission-free stock trades, in addition to their commission-free ETF trades. This may sound like an appealing alternative, but direct indexing is far from simple.

What is direct indexing?

Direct indexing creates a portfolio that tracks an index through buying individual stocks. So, in the case of the S&P 500, you would invest in common stock from the 500 companies that make up the index. By eliminating the commission for each trade, the cost barrier of buying and selling each stock goes down significantly. However, it still requires many trades. In the case of the S&P 500, there are actually 505 common stock listings for the 500 companies in the index. It turns out that a few companies, like Google, have two share classes. So, one could eliminate the expense ratio of 0.04% currently charged by the iShares Core S&P 500 ETF (ticker: IVV). For a $100,000 portfolio, that is a savings of $40 a year. For portfolios of this size, I would argue that the convenience of trading a single ETF is worth $40 a year.

Tax benefits of direct indexing

When an investor builds a portfolio of common stock with direct indexing, they get more control over its holdings. While ETFs are known to be very tax efficient, tax loss harvesting is not possible at the individual security level. This benefit doesn’t make a difference in retirement accounts that aren’t paying taxes on selling stocks, but can be significant in taxable accounts for high income earners.

Conclusions

I am happy to see commissions for stock trades hitting $0, but I’m not convinced that for most investors, direct indexing makes sense. There is a cost savings, but the additional effort could be significant. And, if your larger investments are in tax-deferred or exempt retirement accounts, there aren’t any tax benefits available anyway. Tax loss harvesting appears to be the most compelling reason to direct index. It is most beneficial to individuals paying the highest marginal tax rates.

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.
Posted on

October Portfolios and Third Quarter Market Summary

The October 2019 optimal portfolios are now available to subscribers of ETFMathGuy. So, please log in and select your discount broker to see the effect of current market conditions on our optimal portfolios. Here, we also summarize the market dynamics in the third quarter.

Third Quarter Market Summary

Today’s issue of the Wall Street Journal had several articles that nicely summarized the latest quarter for ETFs. Today, I discuss two articles. The first deals with investing in precious metals, and the second with preferred stock.

Precious Metals

The first article discusses the opportunity of investing in precious metals in a rate falling environment. The author points out that holding precious metals, like the popular gold ETF (ticker: GLD) or sliver ETF (ticker: SLV) don’t produce a yield like stock and bond ETFs. Then, the article goes on to suggest the “safe haven” aspect of precious metals may be driving their demand. The image below shows that the opportunity for large gains is possible, if investors are willing to accept a high degree of volatility.

Returns of three precious metals in the 3rd quarter, 2019. Source: WSJ, October 1, 2019.
Returns of three precious metals in the 3rd quarter, 2019. Source: WSJ, October 1, 2019.

Preferred stock

The second article discusses a hybrid stock-bond fund that tracks preferred stock. This investment has characteristics of both common stock and bonds, as seen by its performance shown below for a preferred stock ETF (ticker: PGX). Because the riskiness of preferred shared typically falls between stocks and bonds, it is not surprising its returns do too.

Returns of preferred shares ETF vs. stock and bond markets. Source: WSJ, October 1, 2019.
Returns of preferred shares ETF vs. stock and bond markets. Source: WSJ, October 1, 2019.

Conclusions

The financial markets continue to exhibit very dynamic behavior. But, ETFs continue to offer an opportunity to reach parts of the markets in a cost and tax efficient manner. So, we hope this article helps to inform your decision making when selecting ETFs.

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.

Posted on

Making sense of ETF Liquidity

In my last post, I discussed ETF liquidity risk. After the post, a subscriber to ETFMathGuy asked me to talk more about this risk and how it relates to the wide variety of commission-free ETFs now available.

Bid-ask Spreads

Bid-ask spreads are an excellent way to measure liquidity. Less liquid ETFs generally have higher bid-ask spreads. But, the liquidity of the securities held by the ETF also affects bid-ask spreads. The image below shows the distribution of bid-ask spreads for Fidelity commission-free ETFs, which I updated from my April 2019 post.

Bid-ask spread of Fidelity Commission-Free ETFs, as of 9/22/2019. Source: ETF.com, Fidelity.com
Bid-ask spread of Fidelity Commission-Free ETFs, as of 9/22/2019. Source: ETF.com, Fidelity.com

Minimizing costs

As we see from these results, there is a wide variation of bid-ask spreads. So, about half have spreads under 0.1%, and about 80% under 0.3%. For ETFs traded commission-free, these spreads are likely the largest contributor to cost of ownership. To reduce this cost, an investor can either buy-and-hold for extended periods, or choose ETFs with lower bid-ask spreads. Investors should also avoid trading ETFs close to the market open and close. Higher volatility over a typical trading day can often occur close to the market’s open and close, and can produce higher bid-ask spreads.

What about ETF liquidity during high market volatility?

It is very likely that, during periods of high market volatility, bid-ask spreads will grow. This growth is simply the result of finding a balance between supply and demand. Or, in the case of ETFs, this balance occurs when an ETF seller finds a buyer. Remember that, due to liquidity risk, we can expect a return premium over risk-free investments. If market volatility is a concern, investors should seek lower volatility investments (e.g. bonds over stocks), and/or seek lower volatility in their portfolio through diversification.

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.