Model Mutual Fund and ETF Portfolios: Choosing a Benchmark Isn't Easy
by James B. Cloonan
Through March, the 2012 equity market has been a friendlier place than we have seen for a while.
The S&P 500 index was up 12.5%, as measured by the Vanguard S&P 500 Index fund (VFINX). This is somewhat better than our Model Mutual Fund Portfolio at 10.0% and our portfolio of exchange-traded funds (ETFs), the Model ETF Portfolio, at 10.9%. Tables 1 and 2 show the longer-term performance of the Model Mutual Fund Portfolio, and Tables 3 and 4 show the history of the Model ETF Portfolio.
In this article
- Performance Comparisons
- Portfolio Changes and News
- Looking Ahead
- ETFs: A New Look
- Model ETF Portfolio: Selection Rationale
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Performance Comparisons
It has been brought to our attention that we have used the term “benchmark” incorrectly in relation to the Vanguard S&P 500 Index fund, the SPDR S&P 500 Index ETF (SPY) and the iShares MSCI EAFE Index ETF (EFA). These index funds are based on giant capitalization and moderate value equity holdings, and most of the holdings of both model portfolios are not in this subcategory. A benchmark should show the average performance of all portfolios following the same approach as the portfolio being evaluated. Therefore, we will use the term “comparisons” for these index funds going forward.
VFINX, SPY and EFA are funds based on what most people consider the overall equity market here and abroad to be valid bases for comparison, if not for fund evaluation. Since they are capitalization-weighted, they represent the average performance of all portfolios. In addition, when evaluating a portfolio of funds, should the composite fund get credit or blame for both the selection of equity subcategories as well as the specific funds within each subcategory? The subcategory weightings are not static, and the portfolio’s ultimate performance is an ever-changing combination of subcategory weightings and specific fund selection.
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Discussion
Looking at the small cap mutual funds NOSGX and PENNX, both Yahoo and Google finance show much lower results that your table above. The annual five and ten year returns are as follows:
NOSGX: -1.0, +3.3
PENNX: -1.0, +4.0
Am I misreading something?
posted 10 months ago by Thomas from Massachusetts
Thomas - The column we had marked as "10-Year Return" should read "Since 6/30/03," and we are making that change. Sorry for the confusion. As for the 5-year returns, I see 2.4% for NOSGX and 3.27% for PENNX at Yahoo! and Google (data from Morningstar), matching our figures. Ten-year returns on Yahoo! and Google for these 2 funds are: NOSGX = 7.8%; and PENNX = 8.24%. Jean at AAII
posted 10 months ago by Jean from Illinois
Thanks Jean. I think the difference in the 5-year returns is because I calculated the returns from the charts which don't include dividends.
posted 10 months ago by Thomas from Massachusetts
Just learned today that AMLP is registered as a corporation and not as an MLP. Am now wondering if the 0.85 expense ration can be justified.
posted 10 months ago by Raymond from Arkansas
Is there a reason why the mutual fund portfolio doesn't include an international fund? The ETF does, and several past article in the AAII Journal said that an international exposure would enhance performance and reduce risk.
What am I missing?
posted 10 months ago by Peter from Maryland
Thank you for your comment. We are making some changes in the Mutual Fund and ETF portfolios in August and the subject of international diversification will be examined more carefully. In general it appears that foreign index funds provide less return than similar domestic funds and that the diversification produces only very short term risk reduction. Obviously some foreign funds, such as emerging market funds, provide excellent returns but in general they do not have the promised benefits. We would always consider a foreign fund on the same basis as domestic funds but would not include it just because it was foreign. -James Cloonan
posted 10 months ago by Aaii from Illinois
Few domestic mutual stock fund do invest in foreign country. So i guess exposure and risk is involved.Can we know how much is that exposure from current portfolio
posted 10 months ago by Nick from New Jersey
Why is there not a "Weight in Portfolio" column for the Model Mutual Fund Portfolio. I'm new here.
Thanks
posted 3 months ago by Richard Gillman from California
