All-ETF portfolios

7/21/2008


Over the years, we have advised mutual-fund investors to build a portfolio around our recommended list of funds, ideally mimicking our suggested allocations. Investors who follow this strategy should have done well, as the Forecasts’ recommended fund portfolios have outperformed their benchmarks over the last decade. Since 1998, our Conservative Portfolio has returned an annualized 6.6%, versus 5.5% for its passive benchmark. The Growth Portfolio has gained 7.5% annualized, compared to 4.9% for its benchmark and 3.8% for the S&P 500 Index.

Still, we recognize that fund investors have another attractive alternative — exchange-traded funds (ETFs). With their low expenses and trading flexibility, ETFs offer an appealing alternative to mutual funds. With that in mind, we revisited our alternative all-ETF portfolios, last reviewed in August 2007.

The all-ETF portfolios have posted mixed relative returns so far in 2008. Through July 15, the ETF Growth Portfolio has retreated 14.4%, compared to a 14.7% decline for its benchmark portfolio. The ETF Conservative Portfolio is down 11.0%, versus a decline of 10.6% for its benchmark. The S&P 500 Index is down 16.3%, while the Lehman Brothers Aggregate Bond Index is up 1.8%.

While most of the recommended ETFs have done well, a few have lagged and are being replaced.

Among midcaps, iShares Russell Midcap ($89; IWR) is being dropped in favor of iShares S&P MidCap 400 Index ($77; IJH), while iShares S&P MidCap 400 Value Index ($69; IJJ) is taking the place of iShares Russell Midcap Value ($119; IWS). Also, iShares S&P MidCap 400 Growth Index ($84; IJK) replaces iShares Russell Midcap Growth ($99; IWP).

In other changes, SPDR Lehman High Yield Bond ($43; JNK), with its lower expense ratio and broader portfolio, is replacing iShares iBoxx $ High Yield Corporate Bond ($91; HYG). Vanguard Wellington ($29; VWELX), a top-performing balanced fund that represents 9% of the Conservative Portfolio and 10% of the Growth Portfolio, does not have a suitable ETF replacement. To mimic the fund in the all-ETF Conservative Portfolio, we used a 6% weighting in iShares S&P 500 ($122; IVV) and a 3% position in Vanguard Total Bond Market ($76; BND). For the all-ETF Growth Portfolio, the weights are 6% (iShares S&P 500) and 4% (Vanguard Total Bond Market).

In the table below, we assign allocation percentages that approximate the weightings of our Growth and Conservative portfolios. The all-ETF Growth Portfolio has an expense ratio of 0.23%, versus 0.19% for the Conservative Portfolio.

ETF PORTFOLIO COMPONENTS
% of
—— Portfolio ——
Fund (Price; Ticker)
Conser-
vative
(%)
Growth
(%)
Exp.
Ratio
(%)
Objective
iShares MSCI EAFE Value
($57; EFV)
9
9
0.40
Int'l large cap
iShares MSCI Emerging Mkts.
($127; EEM)
0
5
0.74
Emerging mkt.
iShares S&P 500 ($122; IVV)
13
13
0.09
Large blend
iShares S&P MidCap 400 Growth
($84; IJK) 
9
9
0.25
Midcap growth
iShares S&P MidCap 400
($77; IJH)
9
10
0.25
Midcap blend
iShares S&P MidCap 400 Value
($69; IJJ) 
0
9
0.20
Midcap value
iShares S&P SmallCap 600
($57; IJR)
5
7
0.20
Small blend
SPDR Lehman High Yield Bond
($43; JNK)
9
6
0.40
High yield
SPDR S&P Int’l Small Cap
($29; GWX)
7
7
0.60
Int’l small-cap
Vanguard Growth ($57; VUG)
8
11
0.10
Large growth
Vanguard Total Bond Mkt.
($76; BND)
23
4
0.11
Intermed. bond
Vanguard Value
($53; VTV)
8
10
0.10
Large value 

While most ETFs have very low annual fees, some traditional index mutual funds are nearly as inexpensive to own. Moreover, mutual funds might be better a choice if you plan to build a portfolio through recurring transactions, such as dollar-cost averaging, because buying (and selling) ETFs generates brokerage commissions. If you expect to rebalance frequently, brokerage fees will reduce the cost advantage of an all-ETF portfolio.

FORECASTS
— Year-To-Date —
——— % of Portfolio ———
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
Baron Asset ($53; BARAX)
-17.2
E
9
9
Dreyfus Small Cap Stock Index
($19; DISSX)
-11.6
B
5
7
Fidelity Export & Multinational
($21; FEXPX)
-16.6
D
8
11
Fidelity Leveraged Co. Stock
($32; FLVCX)
-1.8
A
9
10
Fidelity Value ($62; FDVLX)
-17.7
E
9
Northern Small Cap Value
($13; NOSGX)
-10.0
A
Royce Opportunity
" ($9; RYPNX)
-16.0
D
T. Rowe Price Int’l Discovery
($39; PRIDX)
-19.2
D
7
7
T. Rowe Price New Horizons
($26; PRNHX)
-14.7
C
USAA High-Yield Opportunities
($8; USHYX)
-4.7
E
9
6
Vanguard 500 Index
($112; VFINX)
-16.4
D
7
7
Vanguard Dividend Growth
($14; VDIGX)
-9.3
A
8
10
Vanguard Emerging Mkts. Stock
Indx. ($27; VEIEX)
-17.3
C
5
Vanguard GNMA ($10; VFIIX)
2.1
B
Vanguard Inter.-Term Tax
Exempt ($13; VWITX)
1.9
B
Vanguard International Value
($36; VTRIX)
-14.4
A
9
9
Vanguard Short-Term Invest.
Grade ($11; VFSTX)
1.1
B
Vanguard Total Bond Mkt.
Index ($10; VBMFX)
1.4
B
20
Vanguard Wellesley Income
($20; VWINX)
-6.0
C
Vanguard Wellington
($29; VWELX)
-8.5
B
9
10
* Rankings through July 15 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%. c Closed to new investors.

Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com