! Building an All-ETF Subset From the Model Fund Portfolio
James B. Cloonan is founder and chairman of AAII. He is author of the book "Investing at Level3: Higher Returns With Minimal Risk for the Long-Term Individual Investor".


William Willes from LA posted over 4 years ago:

As a professional investment adviser I have recently structured an all ETF portfolio that I will be using for clients. I feel that ETF's offer many advantages over conventional funds. Several worth considering are inter-day liquidity, lower management fees and the ability to enter stops. Although I appreciate your methodology I feel that it is so conservative that you will be hard pressed to beat the indexes. Unless you are willing to step up and buy some alternative ETF strategies just buy SPY or QQQ.

Joseph Stoutenburgh from MN posted over 4 years ago:

I manage my 84 year old mother's trust for income and principal security. Generally I prefer ETFs for broad stock and bond holdings due to their diversification and low cost. However, I have found that when one tries acquire alternative asses classes such as REITS, MLPs and private equity, individual security selection works best.

For example, Mom owns preferred shares of hospital, industrial and hotel REITS purchased at a discount to par, only from firms that have just raised the common share dividend.

MLP funds and ETFs are very high cost products. This is an area where owning 2 or 3 MLPs (e.g. MMP, EPD) with geographically diversified high quality assets and increasing payouts is better than holding a basket of 30-40 MLPs, many of which are sensitive to commodity prices.

Likewise, ETFs devoted to private equity are very expensive and you're better off owning 1 or 2 carefully business development companies (e.g. BKCC, KKR).

I like the author’s your pick of Fidelity Capital & Income (FAGIX) for investing in turn-around situations.

Jamie Morgan from Oz posted over 4 years ago:

By having a large, mid and small cap ETF's from Guggenheim, why not just buy an index.

James Grant from OH posted over 4 years ago:

I have 2 issues / questions I hope Mr. Cloonan will address.

Issue/Question #1 - As I read the selection criteria for the ETF-only portfolio, it says the second methodology selects approaches that "have provided excess returns or reduced risk." I am troubled by the word "or". I believe that, unless you are planning to trade the securities in the portfolio, that one cannot achieve both excess returns and reduce risk. Unless you claim otherwise, please offer a list of ETFs for a portfolio that maximizes returns and another set of ETFs that minimizes risk.

Issue/Question #2 - In addition to a "selection methodology", I would like to see some statements about the planned "trading" strategy for the portfolio. In other words, under what circumstances would you reduce holdings in one of the ETFs or drop it entirely? Even if this is intended to be a "long term buy and hold" portfolio, I think it would be appropriate to state for all readers.

Thank you for addressing these matters.

James Grant from OH posted over 4 years ago:

I guess I will pose a 3rd issue to Mr. Cloonan.

As each of the 3 Guggenheim funds covers a large portion of the stock market, I believe they are very highly correlated. One of the tenets of asset allocation to achieve diversification is to build a portfolio of uncorrelated securities. (Sheldon Jacobs made this point in his article "How to Achieve the Right Asset Allocation" which was published in the AAII Journal in June 2012 and redistributed by AAII by email in the last couple of days.)

So, Mr. Cloonan, how do you justify having such highly correlated ETFs in the portfolio? Or do you believe they are uncorrelated?

John Hawkins from MD posted over 4 years ago:

I'm relatively new to AAII and appreciate the information that is presented to it's readers. The comments also add to the subject content and I look forward to fine tuning my investment strategies. The ETF portfolio is something I'm very interested in !

Lee Dunn from NC posted over 4 years ago:

This is a conservative portfolio. Why not add a few excellent ETFs with higher returns? For example:
BBH (Biotech)
CSD (SpinOff)
PNQI (Internet)
ITA (Aero&Defense)

There are many others highly rated by Morningstar with much higher annual returns.

Robert Mclaughlin from VA posted over 4 years ago:

I appreciate the information on an all ETF portfolio. It certainly makes rebalancing a lot easier and I believe it is diversified enough to provide acceptable risk. My brokerage account is with Fidelity and many of the IShares ETFs trade for free. For example I use ITOT, IJH and IJR for large, mid and small cap ETFs. I don't use Frontier ETFs (maybe I should) but use IEFA and IEMG in a ratio of 2 to 1 for international and Emerging markets respectively and then IYR for Real Estate. All trade free and the comparable ones to the model ETF portfolio are better YTD.

Garrett Cowsert from AZ posted over 4 years ago:

I agree with J Grant. Similarly, it looks like you could just about replace the first 4 etfs with something like VTI as together they seem to cover the whole market. I'd like to see a comparison of what would happen

Robert O'Neill from MA posted over 4 years ago:

These comments are very refreshing and indicative of a caring, thoughtful, yet sophisticated investor base that is a tribute to AAII and its community. No hype, no hysterical comments - nice going folks

Vaidy Bala from AB posted over 3 years ago:

I appreciate the depth of information an diversity of choices. Exclusion of rising Can. ETs is something needs to be addressed as the business opportunity abounds here, though not as much as the US Market. The growing currency exchange is a hinderance for Canadians, right now. As I was trying to find easily digestible info, your articles and opinions and practices , I feel better. Sure I am trying to build a portfolio of ETFs. I have had 2 ETS for 11 years , they appreciated by more than 5 % while I slept (passive). The market crash in 2008 did not do much damage but stocks fell by 40%. I learnt.

thanks once again AAII and its Forum.

Vaidy Bala from AB posted over 3 years ago:

When I looked at the YTR, it is much like Warren Buffett's ie 20% per year for 25 years. Thanks for demonstrating that this is feasible without billions! Some measure of standard deviation would add weight to this strategy.
thanks again

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