Tag Archives: management

4 Portfolio Recipes That Consistently Beat The ‘Lazy Portfolios’

Summary We analyzed several Lazy Portfolios (e.g., static asset allocation portfolios) by running a full set of risk and return metrics. We compared these Lazy Portfolios to over 250 other asset allocation portfolio recipes, both tactical (with dynamic reallocation) and strategic (with a fixed allocation). Four portfolio recipes emerged as winners that consistently beat the Lazy Portfolios. These winners have lower risk and higher return over both the 1-year and 10-year time periods. We recently received a question about the performance of the 8 “Lazy Portfolios” tracked by investment columnist Paul B. Farrell. The term “Lazy Portfolio” refers to a fixed asset allocation that is periodically rebalanced. We like to call this a “strategic portfolio recipe,” but a fixed asset allocation like this can also go by several other names, such as buy-and-hold portfolio, static portfolio, or passive allocation. A strategic portfolio with a fixed allocation can be contrasted with a tactical/dynamic portfolio that changes its allocation over time. Each of the Lazy Portfolios has a backstory or underlying theme, such as modeling the Yale endowment’s asset allocation or copying Ted Aronson’s family portfolio. This article will focus on the overall performance of the 8 portfolios, not their origin stories. Since VizMetrics already tracks over 250 portfolio recipes , we decided to add these 8 Lazy Portfolio recipes to the list of portfolios that we analyze monthly. We were eager to see how these compared to our entire set of strategic and tactical portfolio recipes. The Analysis Process We followed four steps to analyze the risk and return of the Lazy Portfolios and then search for portfolios that outperform the 8 Lazy Portfolios. Create the Lazy Portfolios . We used the exact Vanguard mutual funds and allocations specified for each Lazy Portfolio, and then we backtested their performance using monthly total returns and monthly rebalancing. Our data covered the 10 years ending September 30, 2015. Run the analysis . Then we compared risk and return over the past 1 year and over the past 10 years. We like using the 1-year period since we’ve seen some market turbulence recently, and we like looking at the last 10 years since that period includes the downturn of 2008-2009. If you look at risk vs. return for only a short, upward period, then you can overlook the true risk of the portfolio since the evaluation period doesn’t include much downside variation. Create scatterplots. We plotted risk vs. return for the Lazy Portfolios and all the other portfolios that we track. Filter the results . We found portfolios that beat the Lazy Portfolios, based on both risk and return. Identify the winners . We identified 4 portfolios that beat every Lazy Portfolio over both the 1-year and 10-year periods. The winners included two mutual funds, and two tactical portfolio recipes. Step 1: Create the Lazy Portfolios We created the Lazy Portfolios using Vanguard mutual funds, matching Farrell’s allocations. ETFs could be used instead of mutual funds, but we wanted to remain true to the original portfolio recipes. The Lazy Portfolios are constructed as follows: Lazy Portfolio Name Lazy Portfolio Recipe (ingredients and percentages) Lazy Portfolio: Aronson Family Taxable VEURX =5%, VIPSX =15%, VPACX =15%, VWEHX =5%, VISGX =5%, VISVX =5%, VTSMX =5%, VEIEX =10%, VEXMX =10%, VUSTX =10%, VFINX =15% Lazy Portfolio: Fundadvice Ultimate Buy & Hold VFINX=6%, VFISX =12%, VFITX =20%, VEIEX=6%, VGSIX =6%, NAESX =6%, VISVX =6%, VIVAX =6%, VIPSX=8%, VTMGX =12%, VTRIX =12% Lazy Portfolio: Coffeehouse VFINX=10%, VGSIX=10%, NAESX=10%, VISVX=10%, VIVAX=10%, VGTSX =10%, VBMFX =40% Lazy Portfolio: Margaritaville VIPSX=33%, VGTSX=33%, VTSMX=34% Lazy Portfolio: Dr. Bernstein’s No Brainer VFINX=25%, VEURX=25%, NAESX=25%, VBMFX=25% Lazy Portfolio: Second Grader’s Starter VBMFX=10%, VGTSX=30%, VTSMX=60% Lazy Portfolio: Dr. Bernstein’s Smart Money VEIEX=5%, VEURX=5%, VPACX=5%, VGSIX=5%, NAESX=5%, VISVX=10%, VIVAX=10%, VTSMX=15%, VFSTX =40% Lazy Portfolio: Yale U’s Unconventional VEIEX=5%, VTMGX=15%, VIPSX=15%, VUSTX=15%, VGSIX=20%, VTSMX=30% Step 2: Run the analysis Next we calculated the risk and return metrics for each of the 8 Lazy Portfolios. For the risk measure, we used Maximum Drawdown, which is the maximum percentage that each portfolio lost in value during the period, as measured at the end of each month. We like Maximum Drawdown for measuring risk since it captures quantitatively the “ouch!” that we feel when our portfolio hits the bottom. For the return measure, we used total annual return, which assumes that distributions are reinvested during the period. The Lazy Portfolios showed the following risk and return characteristics, for the period ending September 30, 2015: Lazy Portfolio Name 1-year annual return (%) 1-year maximum drawdown (%) 10-year annual return (%) 10-year maximum drawdown (%) Lazy Portfolio: Aronson Family Taxable -2.8 -9.2 5.9 -41.1 Lazy Portfolio: Fundadvice Ultimate Buy & Hold -2.4 -7.2 5.3 -35.7 Lazy Portfolio: Coffeehouse 0.7 -5.6 6.1 -36.0 Lazy Portfolio: Margaritaville -4.0 -8.5 5.0 -40.5 Lazy Portfolio: Dr. Bernstein’s No Brainer -1.6 -7.8 6.0 -43.3 Lazy Portfolio: Second Grader’s Starter -3.4 -9.6 5.7 -49.2 Lazy Portfolio: Dr. Bernstein’s Smart Money -1.0 -6.3 5.5 -37.6 Lazy Portfolio: Yale U’s Unconventional 0.9 -7.0 6.5 -42.2 Benchmark: The SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) -0.8 -8.5 6.7 -50.8 Note that all the Lazy Portfolios had a maximum drawdown exceeding -35% over the past 10 years, with most worse than -40%. By comparison, the SPDR S&P 500 Trust ETF had a maximum drawdown of -50.8% with a 10-year return of 6.7%. Step 3: Create the scatterplots Now let’s separate the wheat from the chaff using a risk vs. return scatterplot. We plotted the performance of all the Lazy Portfolios along with all the other portfolio recipes in one view. This allows us to visualize two important metrics (risk and return) at the same time. With risk and return shown on the scatterplots below, the best portfolios (with the highest return and lowest risk) appear at the top left. In the plots below, the orange diamonds are the Lazy Portfolios. The blue squares are the portfolio recipes that showed both higher return and lower risk compared to the Lazy Portfolios. The yellow triangles are the additional portfolio recipes tracked by VizMetrics . For a benchmark comparison, we’ve also added SPY, shown as the purple circle. (click to enlarge) The 10-year scatterplot covers the period October 2004 to September 2015. The 1-year scatterplot covers the period October 2014 to September 2015. Step 4: Filter the results You can see that several blue squares are “northwest” (above and to the left) of all the orange Lazy Portfolios. Each blue square represents a portfolio with higher return and lower risk than every one of the Lazy Portfolios. In the 1-year scatterplot, there are 36 blue squares that beat all the Lazy Portfolios. In the 10-year scatterplot, there are 38 blue squares that beat all the Lazy Portfolios. Over the past 10 years, the broad U.S. equity market (represented by an exchange-traded fund, SPY) has generated a higher return than each of the Lazy Portfolios. But this higher return is accompanied by higher volatility. The Lazy Portfolios each have some fixed income exposure and this offers a lower-risk alternative to SPY that some investors may prefer. If we consider both the 1-year and 10-year time period, we find that the following four portfolios beat every Lazy Portfolio based on risk and return: The Four Winners (that outperform all of the Lazy Portfolios) 1-year annual return (%) 1-year maximum drawdown (%) 10-year annual return (%) 10-year maximum drawdown (%) Vanguard Wellesley ( VWINX ) 0.9 -3.2 6.8 -18.8 Vanguard Balanced ( VBIAX ) 1.0 -5.2 6.6 -32.5 Minimum Conditional Value-at-Risk Portfolio ( t.cvar ) 4.1 -4.0 10.0 -11.0 Minimum Drawdown Portfolio ( t.loss ) 8.0 -4.6 9.8 -13.4 Benchmark: S&P 500 ETF -0.8 -8.5 6.7 -50.8 Another portfolio, the “Strategic 60-40 Portfolio” ( s.6040 ) nearly beats all of the Lazy Portfolios, too. This portfolio beats 7 of the 8 Lazy Portfolios (all except “Yale U’s Unconventional”) over the 1-year and 10 year periods. The Strategic 60-40 Portfolio returned 6.4% over 10 years, and “Yale U’s Unconventional” returned 6.5%. Conclusions The 8 Lazy Portfolios do provide some diversification and have shown middle-of-the-pack performance. But there are better choices for investors. If you want a lazy, easy-to-maintain portfolio then either of the Vanguard funds, VWINX or VBIAX, are a better choice. These funds are even lazier than the 8 Lazy Portfolios, since you don’t have to buy and rebalance the ingredients yourself. Importantly, these Vanguard funds also provide better performance with lower risk. That’s a true “no brainer.” Or if you seek higher returns, and if you’re willing to rebalance monthly, you can look at tactical portfolio recipes, such as t.cvar and t.loss . To view the full set of risk and return scatterplots for over 250 portfolio recipes, sign up for a free trial of the VizMetrics Investor subscription. This also includes risk and return analytics for the 1-, 3-, 5-, 7-, and 10-year periods.

Bottom-Fishing With These Commodity ETFs?

After a stretch of nine awful months, broad commodities started to put themselves in order from the start of the fourth quarter. Most commodity ETFs were in the green in early October on unexpected strength from a weaker dollar, rebounding oil prices and stabilization in the key commodity-consuming nation, China, that brightened the lure for commodities. The dollar strength, supply glut, relentless economic turmoil in China and faltering global growth have been nagging botherations for commodities this year. Notably, a rising U.S. currency makes dollar-denominated assets more expensive to foreign investors, thereby dulling the appeal for commodities. As a result, the broader commodity market, as represented by the S&P GSCI Total Return, is down 17.6% so far this year (as of October 12, 2015) and has tagged itself the worst-performing asset class this year. Soft Job Data = Weak Dollar However, with a downbeat U.S. jobs report, global growth concerns and a subdued inflationary outlook on the backdrop, all talks about the Fed lift-off cooled off instantly. The tentative timeline of the Fed rate hike has been pushed to early next year, and the greenback fell from its prior height for a valid reason. This ushered gains for the broader commodity market. To add to this, commodities behemoth Glencore Plc’s ( OTCPK:GLCNF ) announcement that it will close its supply of many actively traded commodities – from zinc to copper – also boosted trading in the space. Commodities approached the biggest weekly gain in three years in the week ended October 9. Commodities Yet to Hit a Bottom? Several analysts were of the opinion that the worst may be over for commodities. Having slid for over four years, commodities are now offering a cheap valuation. The S&P GSCI Total Return index was down 38.3% in the last one-year frame, 19.3% down in the three-year frame and 9.9% down in the five-year frame (as of October 12, 2015). As per Market Realist, if we go by the Bloomberg Commodity Index, the asset class is off around 50% from high it hit in 2011. Still, investors should note that the recent bounce in the space appears short-term in nature. The relative strength index of the iShares S&P GSCI Commodity-Indexed Trust ETF (NYSEARCA: GSG ) currently stands at 51.06, indicating that the product is yet to enter oversold territory. Fundamentally, the global economy is yet to stand on its own feet, indicating a still-weak demand profile for commodities. China: A Pain in the Neck Just as the commodities took off, the Chinese economy started hitting downbeat data points all over again. The country’s trade numbers for September might have come in slightly better than expected; yet they showed that growth momentum is on the line. Plus, the economy’s September inflation turned out softer than expected. Moreover, the greenback might have taken a pause, but would get back its lost strength once the liftoff talks return with full force. Further, most commodities like gold and silver act as hedges against inflation, which is presently subdued globally and posing as a headwind for commodities. Thus, it would be foolish to say that bad patch is over the commodities space, as ominous clouds are still hanging above. Still, investors having a strong stomach for risks might try bottom-fishing and riding out near-term tailwinds. After all, there are some metal and related ETFs which offer great protection against market volatility and come out as safe havens. These metals could be good picks if the market remains edgy for some more time. For them, we highlight three commodity ETFs below that could act as better plays in the current market. SPDR Gold Trust ETF (NYSEARCA: GLD ) Gold is often viewed as a safe-haven asset to protect against financial risks, and has performed well lately (despite deteriorating fundamentals) on heightened market volatility. GLD tracks the price of gold bullion measured in U.S. dollars. The fund is the most popular and liquid bet in its space, with an asset base of $25.7 billion and an average trading volume of over six million shares a day. It charges 40 basis points as fees. This gold bullion fund was up about 5.3% in the last one month. It has a Zacks ETF Rank #3 (Hold). iShares Silver Trust ETF (NYSEARCA: SLV ) Silver has an edge over the gold, as the white metal is used in a number of key industrial applications. This metal is also viewed as an alternative investment to risky assets during economic uncertainty. The fund tracks the price of silver bullion measured in U.S. dollars. This ultra-popular silver ETF is worth over $5 billion and has heavy volume of nearly 5.8 million shares a day. It charges 50 bps in fees per year from investors. SLV was up over 9.9% in the last one month. The fund has a Zacks ETF Rank #3. First Trust Global Tactical Commodity Strategy ETF (NASDAQ: FTGC ) This $204.4 million fund is an actively managed broader commodity ETF. It charges 95 bps in fees and has high exposure in silver, wheat, cattle feeder, lean hogs, cocoa, coffee and sugar. Notably, most of these commodities are presently witnessing an uptrend in prices, making the product an intriguing play even in a rough commodity trading environment. The fund added over 3% in the last one month. Original Post

S&P 500 ETFs Vs. Ex-Sector ETFs

The replication of the broader U.S. market – the S&P 500 index – may be surging lately on Fed-induced optimism, but on the year-to-date frame it is still a laggard (as of October 15, 2015), having slid about 1.6%. Relentless global growth worries, be it over China, Europe, Japan or the emerging market block, and occasional issues in some specific corners of the domestic market hit the index hard this year. Even if the market rebounds in the final quarter of the year on hopes of persistent inflows of cheap dollar from the Fed, cheaper valuation and the seasonal tailwind of the all-important holiday season, the odds are not out of the way. After all, the S&P 500 index is made up of large-cap stocks which are largely tied to the global perspective. This is where the idea of the Ex-Industry S&P 500 ETFs launched by ProShares comes from. As of now, ProShares has four ETFs, namely the ProShares S&P 500 Ex-Financial ETF (NYSEARCA: SPXN ), the ProShares S&P 500 Ex-Health Care ETF (NYSEARCA: SPXV ), the ProShares S&P 500 Ex-Technology ETF (NYSEARCA: SPXT ) and the ProShares S&P 500 Ex-Energy ETF (NYSEARCA: SPXE ). As the names suggest, all these ETFs provide exposure to the companies of the S&P 500, with the exception of those companies included in the financial, healthcare, technology and energy sectors, respectively. How Do These Fit in a Portfolio? Notably, Financials, Medical, Technology and Energy account for about 20.7%, 13.7%, 20.6% and 4.1% of the S&P 500 index, respectively. So, if a particular sector is underperforming at a given period of time, investors can easily chuck that out from the broader S&P 500 index by investing in that ex-sector ETF. What could be a better example than the energy sector, which has been a pain for the last one and a half year in the marketplace, and is still not showing any definite sign of a recovery anytime soon? In such a situation, an ex-energy S&P 500 ETF – SPXE – could an intriguing pick. The technique is equally gainful even at the time of short-selling. If a sector is outperforming the broader market, investors can easily short-sell that particular ex-industry ETF and earn smart gains. The aforementioned sectors outperformed/underperformed the broader market index this year and in previous years as well by a wide margin. The chart below can be used to understand the trend: ETFs YTD Return 1-Year Return 5-Year Return Financial Select Sector SPDR ETF (NYSEARCA: XLF ) -5.34% 5% 60.3% Energy Select Sector SPDR ETF (NYSEARCA: XLE ) -12.7% -16.4% 16.6% Technology Select Sector SPDR ETF (NYSEARCA: XLK ) 1.3% 11.2% 73.8% Health Care Select Sector SPDR ETF (NYSEARCA: XLV ) 1.1% 13% 121.4% SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) -1.6% 7.3% 71% Moreover, the issuer noted that investors might have enough sector exposure from the other holdings, and so, could be intrigued by an ex-sector ETF. Below, we highlight the concerned ETFs in detail so that investors can get a fair idea of which ex-sector ETF can emerge as a game changer and when. As far as competition goes, the newly launched funds should receive their share of success ahead, given that their underlying idea is novel. SPY in Focus This most popular ETF with $131 billion of assets charges 9 bps in fees. IT (20.6%), Financials (16.1%), Healthcare (14.4%), Consumer Discretionary (13%) and Industrials (10.2%) get doubt-digit exposure in it. Energy has a relatively low exposure of 7.4% in the fund. SPXN in Focus This new 441-stock fund charges 27 bps in fees and has amassed about $4.1 million of assets, having debuted in late September. IT (24%), Healthcare (18.3%), Consumer Discretionary (15.5%), Industrials (11.9%) and Consumer Staples (11.6%) are the top sectors with double-digit weight. The product has a P/E ratio of 23.59 times. Given the low interest rate environment and the potential pressure on the financial companies’ net interest margin, some investors might choose to pick this fund at the current level. SPXV in Focus This 446-stock fund also has $4 million in assets. Here, IT (23.6%), Financials (19.6%), Consumer Discretionary (15.2%), Industrials (11.7%) and Consumer Staples (11.4%) get doubt-digit exposure. The product has a P/E ratio of 20.50 times. Occasional sell-offs in healthcare stocks on overvaluation and pricing issues can be opportune times for this fund. SPXT in Focus This 428-stock fund has a P/E of 22.10 times. Financials (21.5%), Healthcare (19.7%), Consumer Discretionary (16.6%), Industrials (12.8%) and Consumer Staples (12.5%) get doubt-digit exposure in the fund. While the technology sector saw great momentum lately, this high-growth sector normally succumb to a slowdown if global growth concerns flare up or a flight-to-safety trend sets up. SPXT can be an answer to these sector-specific tough times. SPXE in Focus This 462-stock ETF has a P/E of 22.01 times. IT (21.6%), Financials (18%), Healthcare (16.4%), Consumer Discretionary (13.9%) and Industrials (10.7%) get doubt-digit exposure in it. This should be the most-eyed fund now, given the relentless energy price slump. Original Post