Nov 30, 2010
During the first part of the year, we created an ETF list for the ETF screener page we called ‘Primary Indexes’ – which was just meant as a sample of a few different important markets.
Rather than grow the pre-packaged ETF lists on the ETF screener page ever longer, we instead are updating the primary indexes list (now called 'Tactical Indexes') to reflect some thoughts we have on the broadest ETFs in existence (some of which made up the old primary indexes list).
Most active managers have generally low enthusiasm for the big, broad ETFs that try to represent everything. ETFs like Vanguard Total Market (VTI), MSCI Total World Index (ACWI), MSCI EAFE (EFA) index, Vanguard World Ex-US (VEU) -- these are not very interesting indexes. They just represent the broadest indexes possible and are dominated by the largest companies in the world.
It is unlikely these types of ETFs are ever going to have very good relative long-term returns and yet they are not immune from significant drawdowns. So we are presenting a new list with the idea of looking with a little more detail at market segments and just ignoring these mega-cap indexes for this particular list.
Early in December, we will talk more about using a ‘core-satellite’ type of approach to ETFs when we add an exciting new application to the site. A portfolio can be managed as multiple pieces --- one piece could be a relatively conservative allocation that draws on traditional indexing methods (with or without those broad mega-cap indexes). The second piece can be a ‘return-enhancement’ portfolio allocation that utilizes some active management techniques that we have on the site -- such as relative strength.
The important thing here is thoughtfully balancing return and risk. The more you can simulate this with historical market relationships – the better you can estimate how your portfolio may act in the future. We don't know of too many sources that attempt this specific core-satellite backtesting aspect to portfolio management. We doubt it exists except inside the walls of a few buyside firms.
Up until now, the site has been presenting modules that might better be thought of as ‘components’ to a bigger strategy. Shortly, we will begin the move to taking these components and building something that goes up one more level ---- combining component strategies into a greater whole.
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