Ultra Broad ETFs: Mega-Cap U.S. & Mega-Cap International

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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Comments (5) -

Nov 30, 2010 18:01 #

I am looking forward to your new application where a portfolio can be managed as multiple pieces. Currently, I am running 80% of my capital as a well diversified ETF portfolio.  Besides other rules, I am selling all ETFs which are below their 200 dma (that helped me preserve my capital in the last 2 bear markets). With the other 20% I am more aggressive and hold the top 3 relative strength ETFs . It will be interesting what the combined back-test results are, especially for the volatility and drawdown.

Keep improving your superb site.  On my wish list: Moving Average (MA) back-testing with 2 MA crossing as signal (e.g. 200 DMA + 20 DMA) – this would reduce the whipsaws (compared to price crossing the 200 DMA).

hugos Germany

Nov 30, 2010 18:45 #


I like the strategy thoughts Hugos.
You can never really stop the whipsaws of trend-following methods.  But yes, you surely can reduce them.  Testing really helps in this regard as you can learn by watching many different markets.  We will continue to make all the apps better so stay tuned.

Chris United States

Dec 01, 2010 16:38 #

Im really excited that you guys are being proactive in the site development. I just love your back-testing models. Keep up the good work!!

BobG United States

Dec 02, 2010 08:31 #

Thanks for the new application “Tactical Asset Allocation - Relative Strength
“.  With it Portfolio I +II can not be the same. Why? E.g. Portfolio I: 80% weight with top5 and Portfolio II (same ETFs): 20% weight with top2.

But what would be even more interesting: Portfolio I (conservative): 80% weight with only ETFs invested that are above their e.g. 200 dma and Portfolio II (aggressive): 20% weight with holding e.g. the top 3 relative strength ETFs .
(see my comment above Nov. 30).

hugos Germany

Dec 02, 2010 09:00 #

I agree with you Hugos -- that would be interesting.  

However, I think you may be able to research new ideas and possible additive methods to your existing process using this and future apps ---  I know I have.

Chris United States

Comments are closed