Tag: risk tolerance

Posted on

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.
Posted on

ETF Investments and inverted yield curves

In this post, I discuss a very popular topic in the financial news recently. The term “inverted yield curve” has come up quite a bit. Many consider it as a good indicator of a recession. So here, I will review the fundamentals on what a yield curve is. Then, I’ll comment on its relevance to ETF investors.

The Yield Curve

The yield curve visualizes U.S. treasury bond yields at various times to maturity. As of August 20, 2019, the yield curve looked like this.

Yield curve on August 20, 2019. source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
Yield curve on August 20, 2019. source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

I’ve highlighted with asterisks (*) the yield on the two and ten year treasuries. So, these bond maturities had yields of 1.50% and 1.55%. These two maturities are often picked to represent short-term vs. long-term investments in U.S. treasury bonds. That spread, or difference in yields, is 0.05% as of August 20, 2019. Of course, if we chose “short-term” as 1 year, then indeed we would have an inverted yield curve with a spread of -0.17%. In any case, the two-to-ten year spread is very small, as compared to what has been seen so far in 2019.

Spread between two and ten year U.S. treasury bonds. source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019
Spread between two and ten year U.S. treasury bonds. source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019

What does a smaller (or negative) spread mean?

The general argument is that demand for longer term bonds is growing as investors flee the volatility of the stock market. This flight to bonds, or preferably bond ETFs, does seem to be prudent, particularly for investors with high concentrations of stock investments seeking to better manage stock market risk. So, I would argue that, if you have a well diversified portfolio of stocks and bonds, one can largely ignore all this discussion of the inverted yield curve. Instead, investors should focus on their own risk tolerance and long-term goals, as all markets correct themselves from time to time.

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

Stocks and Bonds in an ETF portfolio over the long-term

Stocks and bonds carry many benefits when held over the long term. In this post, I highlight a few aspects that are important to individual investors.

Two of the largest stock and bond ETFs analyzed each month by ETFMathGuy follow the tickers symbols IVV and AGG. IVV tracks the S&P 500 index, which consists of large U.S. companies. The top 10 holdings of IVV appear below.

Top 10 holdings of the iShares Core S&P 500 ETF. Source: etf.com/ivv
Top 10 holdings of the iShares Core S&P 500 ETF. Source: etf.com/ivv

The ticker symbol AGG tracks the Bloomberg Barclays U.S. Aggregate Bond Index. As we discussed in our previous post on the “Fundamentals of Fixed Income ETFs“, quality and maturity are two important components. The quality component of this ETF is largely influenced by its 40% of holdings of U.S. government bonds, and over 20% of mortgage backed securities. Top sector holdings appear below.

Top 10 sector holdings of the iShares Core U.S. Aggregate Bond ETF . Source: etf.com/agg
Top 10 sector holdings of the iShares Core U.S. Aggregate Bond ETF . Source: etf.com/agg

The bonds in AGG have an average maturity of about 8 years. Consequently, interest rate changes generally affect its price more than similar bond ETFs with shorter maturities.

Long term returns of stocks and bonds

The fundamental information about stock and bond ETFs is important, but doesn’t really address long-term investment performance. For that, consider the following chart that shows the total return of $100,000 invested in either the stock (green) or bond (blue) ETFs mentioned previously.

Total return of $100,00 invested in IVV (green) and AGG (blue) from January 5, 2004 to July 19, 2019. source: ETFReplay.com
Total return of $100,00 invested in IVV (green) and AGG (blue) from January 5, 2004 to July 19, 2019. source: ETFReplay.com

As this chart shows, much better returns are possible with stocks, provided investors are willing to accept the higher volatility. Annual growth rate of the stock ETF (IVV) is more than double (8.7% versus 4.0%) than the bond ETF (AGG). But, the volatility of the stock ETF is nearly four times (4X) larger than the volatility of the bond ETF.

Asset allocation basics

So, what is the correct allocation between stocks and bonds using ETFs? Generally speaking, investors seeking less risk will seek more bonds and less stock exposure. One simple rule of thumb is the “120-age” formula for stocks. So, a 30-year old investor would be 90% in stocks and 10% in bonds. Similarly, an 80-year old investor would be 40% stocks and 60% bonds. A more conservative approach is the “100-age” formula for stocks. In any case, investment risk typically increases with a higher allocation to stocks, and decreases with a higher allocation to bonds.

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

July 2019 optimal portfolios are now available and discussed in terms of recent and long-term market trends

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.
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.

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

June 2019 Optimal Portfolios are Now Available to ETFMathGuy subscribers

The June 2019 optimal portfolios are now available to subscribers of ETFMathGuy. So, just log in and select your discount broker.

You can now view the June 2019 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.

In all cases, we applied our rigorous portfolio construction process to produce the current portfolios. So, we encourage you to browse through these portfolios to review the following characteristics:

  • Allocation of bond versus stock ETFs in the optimal portfolio
  • Turnover from the previous month or months
  • The effect of risk level on the overall portfolio risk statistics
  • The increase in expected return as risk level increases

We hope you find these portfolios educational!

Where are the ESG funds in the 2019 optimal portfolios?

In our mid-April post, we updated the database used by ETFMathGuy to include the expanded list of commission-free ETFs offered by five discount brokers. We also mentioned one of the most popular themes to hit the ETF landscape, called Environmental, Social and Governance (ESG) investing. For example, Vanguard offers two of these ESG funds.

These two ETFs carry an expense ratio of 0.12% and 0.15%, respectively, consistent with Vanguard’s low-cost philosophy. So, why aren’t these funds appearing in the current portfolios developed by ETFMathGuy?

The short answer is that our portfolio construction process requires a sufficient return history. Based on our backtesting results, we identified an optimal sample period of several years. Unfortunately, the two Vanguard ETFs noted above have only existed since September 18, 2018, or about the last 8 and a half months. Consequently, this history is simply too short for our optimization model to generate portfolios that satisfy investor return expectations.

So, is ESG investing worthwhile?

This is an excellent question! In fact, based on a recent Wall Street Journal article, other experts in the industry shared our concern about a short return history.

“Many of these ESG ETFs are relatively young and have not had a chance to prove if they can demonstrate strong performance”

Todd Rosenbluth, senior director of ETF and mutual-fund research at CFRA

What does this mean for you? Well, if you are an investor focused on using your beliefs to guide your investment decisions, you may find this short history acceptable. However, here at ETFMathGuy, we prefer to make evidence-based decisions. So, we look forward to analyzing longer return histories that may show how ESG funds could be part of an optimal portfolio.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios. June 2019 optimal portfolios are now available.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
Posted on

Using diversification to deal with market volatility

A recent Wall Street Journal article discussed the behavioral aspects caused by market volatility. The article nicely summarizes the long term view of the market. Based on historical analysis, there is a 2% drop in the stock market every 33 trading days, on average. With the Dow at its current levels, that is a 520 point drop every 6 weeks or so.

If this amount of volatility is “keeping you up at night”, perhaps your portfolio isn’t properly diversified? I touched on diversification using bonds in my last post, and will discuss diversification more broadly now.

So, what is diversification?

Simply put, diversification is not allowing for concentrated positions in a portfolio. For example, if you have a portfolio of a single stock, this portfolio is not diversified. But, as more stock is added from different companies in different sectors, investors can often reduce portfolio risk. However, market risk remains, as shown below.

Increasing the number of stocks reduces risk, as measured by the standard deviations of periodic returns.
Increasing the number of stocks reduces risk, as measured by the standard deviations of periodic returns.

Going beyond market risk for wider diversification and reduced volatility

A simple approach to managing portfolio risk is through mutual funds or exchange traded funds. Both investment vehicles hold a basket of many securities, eliminating the need to hold individual stocks to properly diversify. Here at ETFMathGuy, we are advocates of ETFs (exchanged traded funds), because ETFs have better tax efficiency, (usually) lower expense ratios, and often trade commission-free.

Now, most individuals also invest outside the stock market. So, they seek diversification by investing in other asset classes too. For instance, bonds tend to “zig” when stocks “zag”. To see an example of this approach, consider the conservative Fidelity optimal portfolio by ETFMathGuy published for March 2019, and shown below.

Taxable portfolio using Fidelity commission-free ETFs reduces volatility

Assuming an investor buys-and-holds this portfolio from March 4, 2019 through May 21, 2019, the growth of $100 appears below. Notice that the large drop at the end of this time period. This volatility, shown in blue as the S&P 500 ETF (ticker: IVV), is largely unnoticeable in the ETFMathGuy optimal portfolio, shown in green.

Comparing volatility of the conservative ETFMathGuy optimal Fidelity portfolio to the S&P 500 ETF
Comparing volatility of the conservative ETFMathGuy optimal Fidelity portfolio to the S&P 500 ETF

Digging into the statistics reveals compelling information about the volatility. The annualized volatility over this period of the ETFMathGuy portfolio is 4.0% versus 11.0% for the S&P 500 ETF. Clearly, diversification across asset classes (like stocks and bonds) can be a very effective way to manage volatility.


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

Risks and Opportunities in Fixed-Income ETFs

Fixed-income ETFs (also known as bond ETFs) continue to grow at a rapid pace. Bond ETFs now exist across a wide spectrum of characteristics. Looking for shorter or longer maturity? Or, how about higher yield (aka junk bonds) versus investment grade or Treasury bonds? ETFs even cover the bond markets in both emerging and developed economies worldwide.

At this rate, State Street Global Advisers predicts that assets in bond ETFs could reach $1 trillion by the end of 2019.

What is driving demand?

Like stock-based ETFs, low cost is a big driver. Greater tax efficiency, as we discussed in detail in a post earlier this year, over bond mutual funds helps too. But, the biggest demand could be simply choice.

“Investors really have a lot of choices — more than they’ve had in the past five years. “

Noel Archard, State Street Global Advisors

Liquidity concerns?

Our opinion at ETFMathGuy is that liquidity concerns are minimal. In fact, real-time ETF price availability helps the price discovery process, and should improve liquidity.

“Fixed-income ETFs have been tested more than once over the past 10-11 years, without any major issues. “

Rich Powers, Vanguard

The current focus of fixed-income ETFs

The current focus of fixed-income ETFs is now in portfolio construction. Here at ETFMathGuy, we are helping to lead this initiative by building portfolios to take full advantage of what fixed-income ETFs have to offer. For instance, in the May taxable conservative portfolio for Vanguard, we show a portfolio with a a variety of fixed-income ETFs in it. We also seek to include higher volume alternative ETFs, to mitigate any possible liquidity issues and minimize the bid-ask spread trading costs.

May 2019 taxable optimal portfolio for risk conservative investors, by ETFMathGuy.
May 2019 taxable optimal portfolio for risk conservative investors, by ETFMathGuy

In conclusion, fixed-income ETFs are in important core component of an optimally diversified portfolio. We invite you to browse through the current month optimal portfolios to see the importance of bond 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

May 2019 Optimal Portfolios are Now Available to ETFMathGuy subscribers

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.

Unsure of which discount broker to pick?

If you haven’t yet settled on a discount broker that offers commission-free ETFs, consider the following. Last month, we showed the updated expense ratios and bid-ask spread for Fidelity and Schwab’s commission-free ETFs. Below is the updated information for our other three brokers, Ameritrade, ETrade and Vanguard.

Expense ratios, as of April 2019, for commission-free ETFs offered by Ameritrade, ETrade and Vanguard.
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.

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.

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

April 2019 Optimal Portfolios are Now Available to ETFMathGuy subscribers

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

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

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

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

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

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

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

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

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

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

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

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

Posted on

ETFs to Mitigate Volatility and Enhance Diversification

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

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

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

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

Quote from Ben Johnson, Director of Fund Research at Morningstar

We hope you enjoy reading this WSJ article!

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

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


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