ETF's Diversification

10 replies [Last post]
beramberger's picture
Offline
Joined: 2006-03-06

I'm a new investor ; relatively small : Broker has put us in 14 ETF's and 4 bond/treasury funds (LQD;AGG,IEF;TIP). Sectors are Energy,Financial, Industrial, Consumer Stp); Portfolio is about 800k.
 
Question: when is diversification too much diversification so that you just mimic the arket rather than beating it -and- whay are ETF's better than mutual funds if, in fact, they are.
Thank you
 

troll's picture
Offline
Joined: 2004-11-29

ETFs are cheaper, so to that extent they're "better".  They also tend to be smart, tax-wise. There are year long arguments about indexing (which is what most ETFs are) versus active management (as in mutual funds or SMAs), so don't expect that debate to be settled in this thread. Honest, smart people differ on the subject. What it boils down to is what you’re comfortable with.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
It sounds like you're strategically positioned in the major indexes (large, mid and small cap, emerging markets and EAFE), probably split between the growth and value models of each of the domestics and a couple of tactical allocations in some specific market sectors. You have the various fixed income sectors covered. I wouldn’t worry about being “too diversified” as your allocation isn’t just “the market” (which usually translates to most people as just the S&P 500) and hopefully your holding are weighted to give you the risk/reward posture you need to achieve your financial goals. Using indexes you’re probably not going to beat a similarly weighted composite blend yardstick, but in the long run you should beat the “market” (again, usually the S&P 500 or the Dow) because the mid, small and international parts of the portfolio should outpace the major large-cap oriented indexes..
To give you an idea of recent past performance, over the past 5 years or so the “market” has been flat while properly diversified portfolios as your sounds to be have vastly outperformed the major indexes.
 

skeedaddy's picture
Offline
Joined: 2005-06-16

I can see why you're hunting around for some validation on your present
portfolio. Those first four ETFs are lousy because the FED keeps raising
rates. I would have had you out a year ago.

Energy had a rough quarter but is back on track. Financials are suffering
from a flat yield curve, I'd look at the brokerage group instead. Consumer
staples are sensitive to a higher dollar, which is a result of higher rates.

A colleague of mine is using only ETFs and has created models based on
6 ETFs. This includes short term treasuries, international and natural
resources. Your having 14, seems to be too many to "outpace" the
markets.

I use 2 or 3 international ones to balance out my equity accounts. Last
quarter, I captured 5.89% (over 23% annualized) return while keeping 20%
in cash. So as my esteemed colleague MikeB would say, I have a favorable
risk adjusted return.    

Good Luck.

troll's picture
Offline
Joined: 2004-11-29

skeedaddy wrote:I can see why you're hunting around for some validation on your present portfolio. Those first four ETFs are lousy because the FED keeps raising rates. I would have had you out a year ago.
He was just put in those (he's been asking us questions for a while now), they're relatively short to intermediate term, cover Ts to corps to TIPs. I wouldn't time them and I wouldn't dump them.
It looks like his guy is sort of like me, doesn't time, and doesn't go to large amounts of cash.

skeedaddy's picture
Offline
Joined: 2005-06-16

OK, but money market rates are 4.00%+. Why expose yourself to downside
risk for 1/2 % yield capture? I wouldn't do it with my money. Add in a
commission or a managment fee and it looks even worse.

Can you imagine the guy paying 1.25% to get 4-4 1/2% ?

blarmston's picture
Offline
Joined: 2005-02-26

Energy- long term trend to appreciate
Financials- with the expected Fed pause and potnetial easing in the next year or so, and the relative good fundamental streewnght of diversified financials and banks, not necessarily a horrbile place to be (decent yields as well)
Industrial- with economic opportunity overseas in developing markets, a good area to place a portion of a strategy
Consumer Staples- with the slowing of the US economy, the potential bursting ( or at least easing) of housing market,etc etc, not a bad place to be positioned since everyday goods are always needed.
ALL in all, not horrible places to allocate some monies into.  I would have also added a small allocation to healthcare (globally) and international REITs for a tactical play.
Skee, I do agree that as money rates move up, they are looking increasingly attractive......
 
 

blarmston's picture
Offline
Joined: 2005-02-26

sorry about the misspellings, its 5:15 an I have been working since 7am and am about to take a nap under my desk for a little bit....

troll's picture
Offline
Joined: 2004-11-29

skeedaddy wrote:OK, but money market rates are 4.00%+. Why expose yourself to downside risk for 1/2 % yield capture? I wouldn't do it with my money. Add in a commission or a managment fee and it looks even worse. Can you imagine the guy paying 1.25% to get 4-4 1/2% ?
 
Because you're not getting 4.5% on quality corps or TIPs and there's little possible downside. We're talking inflation protected in the case of the TIPs and limited maturity on the corps. If we were just starting the Fed cycle I'd agree, as it is, we're near the end of it.

troll's picture
Offline
Joined: 2004-11-29

blarmston wrote:sorry about the misspellings, its 5:15 an I have been working since 7am and am about to take a nap under my desk for a little bit....
 
Got the alarm clock set up under there, George?

blarmston's picture
Offline
Joined: 2005-02-26

"Got the alarm clock set up under there, George?"
Absolutely.... Its either turn the chair around, put the phone on forward and catch a 20 minute nap or drive the 5 minutes along the coast to my home and crash on the couch for 20 there... I have to drive along a road thats one block from the pacific, and the urge to go home, ditch the suit for trunks and go flirt with the talent on the beach may be too much for me to overcome.......
So.. its a power nap and then back at it.....

rightway's picture
Offline
Joined: 2004-12-02

If the markets are sideways or just not real robust over the next few
years you will be paying alot in fees to get returns you could get in
free C.D.'s with no risk, which are north of 5% now. 

I would suggest you do what your doing, but take some of that or other
investment dollars and run a couple more actively managed strategies to
try and beat your indexes, and some commodities and managed futures for
non-correlation.

Lastly, remember you can write options on your ETF's.  This could
help.  Your advisor can short ETF's even on a down
tick.   This can help when the broad markets roll over.

Please or Register to post comments.

Industry Newsletters
Careers Category Sponsor Links

Sponsored Introduction Continue on to (or wait seconds) ×