Tag: commission-free

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Value or Growth ETFs?

Investors continue to debate the benefits of value versus growth investing. The recent rotation into value stocks has only heightened this discussion. But, what is the difference between these two investment approaches when using ETFs?

photo of person holding ceramic mug
Photo by Anna Nekrashevich on Pexels.com

How a firm uses its earnings

While there can be many ways to categorize an ETF as a “growth”, one very simple approach is to look at what the firms in the ETF do with their earnings. Businesses like banks, utilities, and well-established firms like Disney or Johnson & Johnson generally pay a dividend. Back in the days of high-priced commissions to buy and sell an ETF, these dividends were very convenient, because they provided cash to investors without requiring them to sell a portion of their shares. Of course, with most brokers providing $0 commission trades, this aspect of dividends is less compelling. Perhaps more importantly though, firms issue dividends when they prefer to return some earnings to the shareholder, rather than reinvesting it into the business.

Growth companies and dividends

Alternatively, most growth companies see that their earnings could be better used if reinvested in the firm. Reinvestment can take the form of a new production facility, research & development, or others. Technology stocks are most often referred to as growth stocks due to their often relentless pursuit of innovation. Notable examples of growth companies are Apple Inc., Microsoft, and Tesla.

What is a better investment?

The debate between value and growth investing appears never-ending. Consider the last 3 years of investment in the Vanguard Large Cap Growth and Value ETFs (tickers: VUG and VTV). For reference, the S&P 500 ETF from iShares (ticker: IVV) also appears, which is a blend of both kinds of stocks.

Three year of total return of large cap growth, value and the S&P 500. Source: www.ETFReplay.com
Three year total return of large cap growth, large cap value and the S&P 500. Source: www.ETFReplay.com

From this chart, the growth ETF outperformed the value ETF over the last three years by greater than a factor of two, while producing little additional volatility. However, so far in 2021, this value ETF performed better than the growth ETF by about 5%, as shown below. Additionally, this value ETF achieved this outperformance with lower volatility.

2021 year to date total return of large cap growth, value and the S&P 500. Source: www.ETFReplay.com
2021 year to date total return of large cap growth, value and the S&P 500. Source: www.ETFReplay.com

Diversify the effect away

Not sure if value or growth is right for you? A simple way to avoid this debate is to diversify into both growth and value simultaneously. By investing in an S&P 500 index ETF, you also get access to a single investment that is extremely liquid and very cost-efficient.

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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2020 Year In Review

Happy New Year from ETFMathGuy! In this post, we conduct a 2020 year in review of stock, bond and ETFMathGuy premium portfolios.

For many, 2020 was an unusual year in the investing world. And, investing in ETFs was no exception. In our first post of 2020, we discussed how we adapted to the new normal of nearly all ETFs trading commission free. That opened our portfolio construction process to consider over 2,000 ETFs. But, as we noted in another post from 2020, we immediately exclude any ETF with under $50 M in assets, which helps an investor avoid ETFs that may soon close, as well as larger bid-ask spreads when traded.

So, how did ETFMathGuy portfolios fare in 2020?

In short, we have been very satisfied with our ETFMathGuy premium portfolios. Our goal was to achieve returns similar to the S&P 500, but at lower risk. We established this goal based on rigorous backtesting all ETFs that were previously commission-free from Fidelity, or slightly less than 500 ETFs. However, in 2020, we expanded into all commission-free ETFs, and the returns from two real accounts at Fidelity appear below.

Total returns for stock market, bond market and two ETFMathGuy portfolios for 2020
Total returns for stock market, bond market and two ETFMathGuy portfolios for 2020

Clearly, we achieved our 1st goal of generating returns “at least as good” as the stock market, which we assume as the S&P 500. These returns were possible thanks to our model’s ability to dynamically adjust to market conditions. For subscribers with free memberships, you can see what these ETFs were by logging into your account, and browsing the 2020 portfolios through June 2020. For example, PALL and ARKK have been consistent components of our optimal portfolios. If you are a current premium subscribers, your January 2021 portfolios and rebalancing calculator are now available for your consideration.

But, what about risk in our 2020 year in review?

The pandemic of 2020 had a substantial impact on market risk. When measured monthly, stock market volatility was 25.8%. Examining the monthly returns for our ETFMathGuy portfolios, we observed an 18.1% and 19.4% and volatility for our moderate and aggressive portfolios, respectively. So, we also achieved our 2nd goal of keeping volatility lower than the stock market. We also revisited our calculation of Alpha and Beta. For the 12-monthly returns in 2020, we found Alpha = 2.48% and Beta = 0.49. Their p-values were 0.09 and 0.02, respectively for the ETFMathGuy aggressive portfolio.  Recall from this post that the smaller the p-values, the greater confidence we have that these are the correct values and have minimal estimation error. So, for those of you “seeking alpha”, these statistics indicate our portfolios likely produced “alpha” in 2020.

Our statistics on 2020 monthly returns indicated that we likely produced "alpha" in our ETFMathGuy aggressive portfolios.
Our statistics on 2020 monthly returns indicated that we likely produced “alpha” in our ETFMathGuy aggressive portfolios.

Forecasting 2021?

We won’t venture a guess at what the markets have in store for investors in 2021. Frankly, there are many, many articles already written on this topic. Instead, we will continue to pursue our goal to construct ETF portfolios that meet or exceed returns like the S&P 500 with lower volatility. If you are interested in accessing the January 2021 premium portfolios, please consider upgrading your membership now at 2020 subscription prices. In the coming weeks, we plan to increase our subscription prices for the new year. Please contact us if you would like a free sample of our latest premium portfolio.

We hope you found this 2020 year in review educational!

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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What are Model Portfolios?

Yesterday’s Wall Street Journal had a very interesting article about model portfolios. So, what are these, and why should an individual investor care about them?

A Wall Street Trend

This WSJ article stated that the use of model portfolios is a growing trend, since it helps take the emotion out of investing. So, these portfolios are based on scientific observations and analysis, rather than an investor’s “instincts” or emotional reaction to current market conditions. A growing number of financial advisors are embracing their use too.

Model portfolios take some of the human emotion out of investing. They provide the comfort of science.

Andrew Guillette, Research Director at Broadridge. source: WSJ, December 4, 2020

Thus, these model portfolios are ones that can “dynamically shift the funds it invests in as markets change”. We are advocates of this approach using commission-free ETFs. Our free and premium portfolios do exactly that, as we update them each month based on current market conditions. Please log in to see these portfolios now, which include the latest market shifts through Friday, December 4th. Premium subscribers also have access to a handy web calculator to assist in rebalancing their portfolio.

How have model portfolios performed this year?

Unfortunately, little is published about model portfolio performance. But, we report our model’s performance for ETFMathGuy portfolios on a regular basis. The image below shows the total returns from January through end of November from our investments at our Fidelity brokerage account.

Total returns from January through November of Stocks, Bonds and ETFMathGuy Portfolios

What about risk?

The performance over the last 11 months look very promising, suggesting a scientific approach to rebalancing an ETF portfolio can perform well in volatile markets. But, how much risk did we take with these investments? Using the monthly returns that led to the total returns shown above, the volatility of the stock market (ticker: IVV) was 26.9%. However, the volatility of the moderate risk ETFMathGuy portfolio was only 18.2%. Not surprisingly, the aggressive risk ETFMathGuy portfolio had a higher volatility of 19.0%, as expected for a portfolio seeking more risk. So, these portfolios continue to outperform the stock market, while also taking less risk as measured by volatility.

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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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.

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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.
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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.
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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.
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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.
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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.
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September portfolios and year-to-date returns

The September 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. In this post, we discuss the year-to-date returns of my personal account using the ETFMathGuy portfolios.

Year-to-date returns

Although there are still four months remaining in the year, I thought this would be a good time to talk about my year-to-date returns. I have personally been using the moderate risk level portfolios in my Fidelity brokerage account since the beginning of the year. Monthly returns, based on the balance in my account, appear below.

Monthly returns using commission-free Fidelity ETFs and the moderate ETFMathGuy risk level.
Monthly returns using commission-free Fidelity ETFs and the moderate ETFMathGuy risk level.

To better understand the returns in my account that maximizes return for a portfolio with volatility half-way between stocks and bonds, I created the next table. Here, you can see that the ETFMathGuy portfolio return so far in 2019 is 14.1%, with a monthly volatility of 2.1%. To one decimal place, the same volatility is seen if an investor had simply maintained a 50% stock and 50% bond fund, re-balanced each month. But, the 50/50 portfolio would have seen a return of only 13.7%

ETFMathGuy portfolio returns are higher than a 50/50 stock/bond portfolio, with the same volatility.
ETFMathGuy portfolio returns are higher than a 50/50 stock/bond portfolio, with the same volatility.

Key takeaways

The ETFMathGuy portfolios appear to be behaving as expected. That is, they have about the same amount of volatility as their benchmark. However, I realized an additional return of about 0.4% in my brokerage account. For a $100,000 portfolio, that is an additional gain of about $400. I will revisit my portfolio’s performance again at the end of the year, so please stay tuned!

The future of ETFMathGuy

For the near future, I will continue to provide the optimal portfolios without a fee. But, in the meantime, I decided to begin accepting donations, if you are so inclined. Please find the donate button at the bottom of the “Join Us” page. For your convenience, it also appears below.

Thanks for supporting ETFMathGuy!

Thank you all for your interest and support in 2019. I hope you all had a wonderful labor day weekend!

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.