Tag: optimal portfolio

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Diversification and February 2020 returns

The stock market experienced a significant drop in the month of February 2020. But, the bond market had a positive total return for the month. In this post, we discuss the benefits of a diversified portfolio during times of market stress, like seen in the February 2020 returns.

A big economic shock

Market returns for the the month of February 2020 were significantly impacted by the corona virus outbreak affecting the global economy. The S&P 500 index ETF (ticker: IVV) lost 8.5% in the month, but the iShares Core U.S. Aggregate Bond ETF (ticker: AGG) gained 1.6%. The stock market appears to be pricing in reduced earnings growth, due to the virus outbreak. Consequently, stock market sellers have rotated their investments into the bond market. Increased demand for bonds is driving up prices, and consequently returns, from bond investments.

The graphic below shows the total returns for the stock market, bond market, and two other portfolios for February, 2020.

Stock, bond and other portfolio returns in February 2020

Using a diversified portfolio and February 2020 returns

In hindsight, the bond market offered a higher return in February 2020. But, exclusively investing in bonds eliminates the possibility of the significant upside potential of the stock market, such as the 31.3% of the stock market in 2019.

One approach to managing risk while realizing some additional return is to invest in a 50% stock and 50% bond portfolio. For February 2020, this would have led to a 3.4% loss. However, wider diversification beyond the mainstream stock and bond markets offered a more substantial benefit. Specifically, the ETFMathGuy’s moderate risk portfolio (shown in a previous post) appears below. It returned 0.1% in February 2020, and was designed to match the volatility of the 50% stock and 50% bond portfolio.

The January ETFMathGuy moderate risk portfolio for taxable accounts.

The additional return comes from our optimal portfolio construction. ETFMathGuy portfolios diversify across other asset and sub-asset classes beyond stocks and bonds using a quantitative methodology. For instance, the portfolio above contains municipal bonds, commodity and tech sector exposure, among others. This diversified exposure has been very favorable to returns so far in 2020. But, market conditions are very dynamic. So, if you are looking for ideas on how to improve your portfolio’s diversification, please check out our current free and premium portfolios, constructed using the latest market data.

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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.
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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.
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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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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.
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August 2019 portfolios are now available based on our current low volatility markets

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 Level
Vanguard optimal portfolios the Month of July, 2019, Moderate Risk Level
Vanguard optimal portfolios the Month of August, 2019, Moderate Risk Level
Vanguard 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.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.