the know-nothing investor

…money doesn't grow on trees, you know?

Tag: ETF

13.MY ETF MARKETPLACE

After I settled each asset allocation I went searching for the equivalent ETF. Because US ETF market is much bigger and offers an enormous variety of funds compared to Europe I decided only to buy US ETFs.

My primary goal was to find ETFs with lowest expense ratio possible, but I also took a peek at market capitalization. Coincident or not, low expense ratios are normally associated with big market caps. In the long run every expense counts.

To define what to buy I used an ETF database and through a simple search of categories I quickly gathered an ETF portfolio, with different asset classes and geographical diversification.

It had passed 7 month since I had quit short-term trading. That was the time I took to learn about ETFs, long-term investing, multi-asset portfolio and how to make one. This was the result:

PortfolioAllocation

 

The expensive ratio is really low with a figure of just 0.17. This means that in a 10 000 usd value portfolio 17 usd will be used in management costs by the ETF issuers. Try to beat this mutual funds!

I was also glad to confirm that the Vanguard ETFs were the ones with lower expense ratios, meaning that Mr. John Bogle’s investing philosophy is still nurtured in his company, which sadly isn’t the mainstream policy in financial business.

The most expensive ETF is the commodity one, DBC – PowerShares DB Commodity Index Tracking Fund, but this was expectable because of contango effect. There were others cheaper, but I wasn’t very fond of their market caps, so I decided to go with the most valued one.

Vanguard also have a cheaper ETF for big american caps instead of SPY, but choosing between them represented less than $0.5 and this allowed me to be exposed to more ETF issuers. It’s also neat to have the benchmark in my portfolio for performance purpose.

Another particularity is that instead of having only one ETF for US stocks, normally it’s choose an ETF for small cap value equities because they have better historical returns, I rather divided it three small, medium and big caps. I like the a idea of following a company’s growth, from small to big cap.

This time it would be different I would make money. I would use my short term knowledge and market-timing for perfect entries. Knowing that if I failed, time would ill mistakes. Although this time I wouldn’t do that kind of mistakes.

I had the money, I knew what ETFs to buy, I was a fresh customer of an US based broker. I had it all. Once again I was so full of myself that I forgot passed lessons and bought all the ETFs in one week and then the market went for a correction.

Oops I did it again…

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iShares –  iShares 20+ Year Treasury Bond ETF – TLT

iShares  – iShares TIPS Bond ETF – TIP

SPDRButon– SPDR Barclays Intermediate Term Treasury ETF – ITE

VanguardButon– Vanguard REIT ETF – VNQ

iShares – iShares Gold Trust – IAU

Invesco– PowerShares DB Commodity Index Tracking Fund – DBC

VanguardButon– Vanguard FTSE Emerging Markets ETF – VWO

SPDRButon– SPDR S&P 500 ETF – SPY

VanguardButon– Vanguard Mid-Cap Value ETF – VOE

VanguardButon– Vanguard Small-Cap Value ETF – VBR

VanguardButon– Vanguard FTSE Pacific ETF – VPL

VanguardButon– Vanguard FTSE Europe ETF – VGK

9.GOING FOR LONG TERM

My days as a trend follower were over. Even if I tried to make money out of the markets as a trader, probably trend following would not be the best way to do it, specially in the post-crisis of 2008.

It was time to have statistical data on my side and this meant to have a geographic diversified multi asset portfolio with periodic rebalancing for a very long time. The truth is that long-term investor in the long run will beat the majority of short-term traders (here and here). But how long is it to invest in a long term basis? For me I thought about my retirement so I decided to invest for a period never less than 30 years.

I had quit trying to get rich in two or three years, instead it would take me 30 years but at least I wouldn’t get broke in the process.

Nevertheless, 2012 had taught me two lessons that needed to be quickly addressed to achieve good performance in the markets:

  • Brokerage costs were a substantial part of my losses.
  • Every Time I had a profitable trade I would pay 28% of it in profit taxes.

In 2013 I changed to an international broker, based in US, which guarantees minimum fees and on profit taxes I decided that my portfolio would only buy and for rebalance purpose I would only use fresh money instead of selling winners to buy loosers. At first it will be easy, after my portfolio gets bigger in value it will get more complicated, but I’ll use dividends money and if needed I will sell. But is like that old saying “dying and paying taxes later the better” and with this simple tax planning it will allowed me to legally escape paying taxes for a long time.

The last thing to decide was what kind of financial instruments I would use to make my long term portfolio and here I quickly restrain my option to two: exchange tradable funds (ETF) or mutual funds.

Based on my conviction on having a portfolio with lower expense ratio as I could, I opted for ETFs.  Although ETFs don’t seek alpha their associated costs are cheaper than those in mutual funds. ETFs only purpose is to track an index, a commodity or a bundle of assets, so they don’t have active management like mutual funds. Besides all cost associated with buying, selling and owning shares, in mutual funds you also need to pay the people that actually run the fund. They can be quite good and excel the performance of whatever benchmark they are following but then you also need to excel and choose the right ones. If you don’t choose a correct amount of right ones probably you will end annihilating any alpha possibility. On the other hand, if I failed as a stock picker why I should I be good at picking mutual funds?  Past performance are not a good indicator of future returns and If you don’t choose the right ones or the management teams start to have worst performances you will need to turnover your portfolio and that will erode your portfolio’s value in taxes and other fees associated.

But how are the performance of those management professionals, that year after year try to beat the market, creating in your portfolio an extra-value? Not great, especially in the long run as you can read here in this great article of Rick Ferri. To resume it, I just want to mention this paragraph: “Maintaining consistently high performance is so difficult for fund managers that less than half (10% to 20%) of the top quartile funds were even able to stay in the top half over the next five years. Approximately 30% to 40% of funds in each category finished in the top half after accounting for funds that go out of business, merged with another fund or changed style categories.”. Of course this tend to get worse as time passes by.

So I realized I could done the same amount of harm to my money as professional and I decided for ETFs.