The August 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 highlight the effect of the recent low market volatility on portfolio turnover.
Low volatility is here, for now…
As discussed in yesterday’s Wall Street Journal article entitled “Markets are Eerily Quiet Right Now“, market volatility has been quite low recently. For the past 35 days, the S&P 500 hasn’t changed by more than 1%. Consequently, the August 2019 portfolios won’t differ much from the previous month. For instance, consider the Vanguard moderate portfolios generated over the past two months.
Vanguard optimal portfolios the Month of July, 2019, Moderate Risk LevelVanguard optimal portfolios the Month of August, 2019, Moderate Risk Level
As these simpler portfolios demonstrate, low volatility produces less turnover. Here, none of the portfolio weights changed by more than a few percent.
Where will the stock and bond markets go from here?
Frankly, we don’t know, as we believe that markets are generally efficient. Market volatility will certainly return to a more typical level at some point in the future. But, when will this occur? Perhaps volatility will pick up when many professional traders return from summer vacation? Or, perhaps markets will stay quiet until the start of the next earnings season?
In any event, when market volatility does return, our monthly portfolio updates will pick up these dynamics and generate a new set of optimal portfolios. We hope you will stay tuned!
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
The July 2019 optimal portfolios are now available to subscribers of ETFMathGuy. So, please log in and select your discount broker. In this post, we will also discuss more about risk and return in an optimal ETF portfolio.
As we mentioned in our last post, there are benefits to having more ETFs to choose from during the portfolio construction process. We showed the potential to increase expected returns. In this post, we highlight another important element – risk.
Risk and Return
Risk and return are two fundamental issue that are important to consider when investing in an ETF portfolio. The chart below shows risk (horizontal axis) and return (vertical axis). Here, we define risk as the annual volatility, measured by the standard deviation of daily returns. We evaluate risk and return using a multi-year sample period selected from our rigorous backtesting process. As this chart shows, the optimal portfolios reside at risk levels between the bond market (ticker: AGG) and stock market (ticker:IVV). And, these portfolios are efficient, since they were selected to maximize the expected return.
Risk (Volatility) and Expected Return in the July 2019 optimal portfolios. Notice that at each risk level (conservative, moderate and aggressive), different ETFs offered by different discount brokers leads to different expected returns.
As this chart shows, cash can be nearly risk-less, based on volatility, but offers returns that may not exceed long-term inflation. Bonds can offer more of a potential return, but with added risk. Even more return is possible from the stock market for those willing to accept additional risk.
What about the last 6 months?
Indeed, it is true that the first half of 2019 has been very good for both stocks and bonds. Based on a recent Wall Street Journal article, “… S&P 500 finished Friday up 17% this year, marking its best first half since 1997 “. According to the site ETFreplay.com, and including dividends, the stock and bond market are up 18.3% and 5.8%, respectively, this year. Will this trend continue? I personally doubt anyone really knows, as I believe that markets are generally very efficient. A better question may be “What level of risk” or “How much exposure” do you want your investments to have in various parts of the market. To end this post, I’ll leave you with one (of many) famous quotes by Warren Biuffet.
“The stock market is a device to transfer money from the impatient to the patient.”
Warren Buffett
We hope you found this post educational!
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
The 2019 optimal portfolios for the month of May are now available to subscribers of ETFMathGuy. Just log in and select your discount broker.
You can now view the current optimal portfolios for the five discount brokers analyzed by ETFMathGuy. These portfolios cover nearly 1,500 ETFs currently offered commission-free from Ameritrade, ETrade, Fidelity, Schwab and Vanguard.
Portfolios now include updated ETF lineups from Ameritrade, ETrade and Vanguard
As we mentioned in our last post, Ameritrade, ETrade and Vanguard expanded their commission-free lineup. So, the portfolios for the month of May now consider these new funds. Here is a simple count of the number of commission-free ETFs now available from our five discount brokers. Note that IRA accounts exclude the 46 municipal bond ETFs discussed in our recent article.
Commission-free ETFs for Taxable and IRA accounts, as of April 30, 2019
However, this lineup change does not significantly alter the ETFMathGuy portfolios. Remember that several years of price history are necessary to build optimal portfolios. So, ETFs that haven’t been around very long will not be considered as part of the later stages of the portfolio construction process.
Expense ratios, as of April 2019, for commission-free ETFs offered by Ameritrade, ETrade and Vanguard.
It is pretty clear that, when it comes to expense ratios, Vanguard is the clear winner. The same can be said for Vanguard’s advantage with generally lower bid-ask spreads.
Bid-ask spreads, as of April 2019, for commission-free ETFs offered by Ameritrade, ETrade and Vanguard.
So, is Vanguard the best broker for commission-free ETF portfolios?
This is an excellent question. In terms of number of commission-free ETFs, Schwab is the leader. But, on the basis of cost, Vanguard is the clear winner. What about diversification? Perhaps the diversification benefit of the Schwab (or some of the other discount brokers) can offset their higher costs? We will explore this topic in a future blog post. Stay tuned!
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
In this post, we revisit the current commission-free ETF lineup offered by the three other discount brokers analyzed by ETFMathGuy. These three brokers include Ameritrade, ETrade and Vanguard.
Ameritrade’s updated lineup of commission-free ETFs
Ameritrade continues to offer 308 commission-free ETFs. Our list used to develop optimal portfolios at ETFMathGuy at the end of last year did change somewhat. Seven ETFs ceased trading in February and March, and most were from WisdomTree.
Seven ETFs ceased trading in February and March, 2019, and were removed from Ameritrade’s commission-free ETF lineup.
Ameritrade replaced these ETFs with seven commission-free ETFs. These replacements come from First Trust, State Street, iShares and Invesco.
Ameritrade added seven funds to their commission-free ETF lineup.
ETrade’s updated lineup of commission-free ETFs
ETrade made a modest increase to their commission-free ETF lineup, increasing from 259 to 274. Their lineup change was due to removing a number of funds from Vanguard. In addition, and like Ameritrade, many of these ETFs from JPMorgan, Legg Mason and WisdomTree ceased trading.
Fourteen ETFs removed from ETrade’s commission-free ETF lineup.
The additional commission-free ETFs offered by ETrade come from a variety of ETF providers, such as Invesco, WisdomTree, iShares and others. The real question here is will these new funds be around for the long haul.
Etrade’s commissoin-free ETF lineup includes 29 additional funds.
Vanguard’s updated lineup of commission-free ETFs
Vanguard made the smallest change to their list of commission-free ETFs, adding only two funds. Consequently, Vanguard’s total lineup increased from 57 to 59, and embraces a new trend in Environmental, Social and Governance (ESG) investing.
Vanguard expands their commission-free ETF lineup.
So what does this mean for an individual investor?
So what this means to an individual investor? A larger number of commission-free ETFs should provide a greater opportunity for diversification and possibly higher returns. Evidence for this appears in the expected returns and volatility estimates in the latest portfolios developed by us at ETFMathGuy. However, what if you are an investor who had invested in one of the ETFs that ceased trading? An article claims that the liquidation process is mostly painless for the investor. It also claims that even if you don’t sell the ETF before it ceases trading, “you are still going to get fair value for the fund based on the final liquidation”. The bigger issue is how removal of the ETF affects your asset allocation and underlying strategy. If you are following the current portfolios at ETFMathGuy, we have already updated our databases to accommodate such a change.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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
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.
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”
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.
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.
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.
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.
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.
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
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.
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.
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.”
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.
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