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%.
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.
There are no portfolio changes in either of the model portfolios. FMI Common Stock fund (FMIMX) continues to be closed to new investors. If you own it, you should continue to hold it. If you do not own it and are new to the portfolio, you should make any selection from the remaining nine funds.
The rationale for the Model ETF Portfolio is provided here. The rules for the Model Mutual Fund Portfolio can be found here.
Not much has changed since my comments in the March Model Portfolios column. The market climb has slowed somewhat, and the day-to-day news has brought back some of last year’s volatility.
I continue to be modestly bullish for the balance of the year, but not enough to change normal allocations.
We began the Model ETF Portfolio six years ago on an experimental basis. We invited you to join with us in examining what was then a new product. We suggested that members simply observe or invest only a small amount until we had a chance to get some history.
We feel we have learned a lot in those six years. In the August 2012 issue of the AAII Journal we will discuss our observations at length and propose a plan for the integration of exchange-traded funds into an overall portfolio.
Until then, you can check for monthly performance updates to both the Model Mutual Fund and ETF Portfolios here.
Get updates about the portfolio that has outperformed the market by 211.9%
since inception!
