ETF Top 100 Multi-Asset Real-Money Portfolio

Mar 06, 2013 in ETF Multi-Asset 100

In portfolio management, the concept of the 'market portfolio' is discussed frequently.  As the textbooks go, if the world were 100% efficient, the only choice for investors would be in what proportion to hold the market portfolio vs the risk-free rate (T-bills).   You could take less risk by holding more cash and more risk by adding leverage to the market portfolio and so its just a risk preference.   Of course, the world is not efficient or else well-proven concepts like relative strength would not work.   Nevertheless, it's always fun to go re-visit the textbook with a real world example portfolio.  

The market portfolio theoretically consists of all assets.   There are problems with doing that in reality but in the end, we can probably create a decent proxy for all assets by making a few assumptions about what it is that dominates the movement of the overall market portfolio.

We will use actual ETF assets for this exercise.   ETFs make this so much easier to calculate because we don't have to worry about so many different mutual fund share classes that are inaccessible to different segments of people.  Trading on a public exchange makes the security available to all --- and competitive forces make it so that if you try to rip people off with high fees, your ETF will lose (or never get) assets.   If you aren't on a public exchange, then you can do all sorts of things --- charge 5% purchase/redemption fees, charge 20% performance fees etc... You can't get away with things like that when you have to compete on a public exchange (or at least not over the long-run).

The top 100 ETFs in assets (real money from real investors -- both individuals and institutions use ETFs) represented $1.07 Trillion (yes, with a 'T') as of December 31, 2012.    Using over a trillion in assets in value is an appealing figure.   We can be pretty sure that there will be some error between this trillion in ETF assets and the 'market portfolio' described in textbooks --- and that is fine.   What we are trying to do is get something that is just a proxy and acknowledge and discuss the differences.  Exchange traded products are especially appealing because assets outside of US large cap stocks are well-represented.  

This portfolio based on real-world multi asset-class weightings has a total return (including dividends) through March 6th 2013 of +3.6%,  which would be a gain of +$39 billion on top of the $1.07 trillion starting amount. That includes everything, from stocks to bonds to alternatives like MLPs, REITs, Preferreds, EM Bonds etc...

US stocks are obviously doing well and providing strong returns above the overall portfolio aggregate.  To the extent you are overweight US stocks, you are surely doing better than this portfolio.  This portfolio is getting held back by gold/silver, gold mining stocks, emerging markets -- and to some extent fixed-income.   Note that fixed-income is not losing much money, its just not making money  (junk bonds are up slightly and treasuries are down a little this year).

The return is what it is -- what might be a more interesting figure is the amount of volatility this portfolio represents and how it compares to various indexes.

Below is the same Top 100 Asset-Weighted return vs the HFRX Global Hedge Fund index.   The returns are pretty close for the year.  Hedge funds obviously own a lot of US equities -- but they are short a lot of US equities as well.   Gold is a popular vehicle in hedge funds, which would be hurting the HF index return this year --- but very likely hurting the hege fund index a lot less than GLD/IAU/GDX are hurting this ETF portfolio return.  


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