Create Your Own Benchmark

Mar 31, 2013 in ETF Multi-Asset 100

One easy and free way to use ETFreplay.com is to build your own benchmark using the free combine page.

On a related note, we created the ETFreplay Multi-Asset 100 as an example of a 'market portfolio' proxy benchmark.   The ETFreplay Multi-Asset 100 attempts to make as few assumptions as possible.   We simply weight ETFs using the starting asset amounts for the year (using published ETF provider figures) and then track their total distribution-adjusted returns.  No adjustments are made for inflows and outflows during the quarter -- instead we will re-weight this benchmark periodically.   (This assumption makes almost no difference as the starting portfolio is so large (well over $1 trillion) that even many billions in net inflows don't make a material difference over shorter periods of time).

One thing to note is that equity ETFs have existed a lot longer than fixed-income ETFs,  so the fixed-income ETF movement has been playing catch-up in recent years as more and more investors turn to ETFs rather than alternate products for their fixed-income exposure.  

Large cap US stocks are the largest component of the index.   That said, large cap US stocks represented just ~37% of overall assets.   Note that we included all of the US sector fund assets in the large cap category as the sector funds (like XLF and XLK) are dominated by large cap US companies.    

An important point here is to remember that the world does not begin and end with the S&P 500.   The S&P 500 is an index made up only of large-cap US stocks.   Sometimes, this segment is the leader (something that good relative strength analysis will identify) --- but many other times, it will lag.    The point of creating a Multi-Asset index is to help put each component of the overall universe into some perspective and get away from using benchmarks that just aren't appropriate for large numbers of investors.   US large caps are very important part of the index --- but still well under 50% of the total.   Fixed-income, int'l stock and various alternatives (gold and others) matter over the long-run too. Below is the path of the overall index during Q1.

 

 

ETF investors in the Multi-Asset 100 made +$48.4 billion in Q1 versus a starting portfolio value of $1.07 trillion.   If you think the world went up double-digit percentage in Q1 just like the S&P 500, you would be mistaken.    Likewise in Q2 2013  ---  there will of course be winning and losing segments of the market.    Over the long-run, you mostly care only that your portfolio balance increases and therefore enjoys the benefit of compounded long-term returns.    And that when large cap US stocks experience a sustained downtrend, you are still managing your portfolio so that large losses are avoided.    

Q1 2013 was really the ideal environment --- at least if you are into things like risk-adjusted returns. Volatility was very low and equity returns were strong.   No matter what your benchmark is, it is obvious that repeated new all-time highs of your overall portfolio is a good thing.   The ETF Multi-Asset 100 did this and actually managed to close the quarter on its high.  

Note that a portfolio made up of 100% midcap US stocks (IJH) returned +13.5% for the quarter while a portfolio of 100% gold miners (GDX) was -18.4%.    The largest Chinese equity ETF (FXI) was -8.7% and the largest Oil & Gas MLP (AMJ) was +19.7%.     These are all index investment vehichles.   The weighted average expense ratio for the top 100 is  0.27% (27 basis pts).    The IJH (mid-cap) return of +13.5% of course includes the pro-rata expense ratio (expenses for ETFs are taken out and embedded in the market price return and would be effectively 5 basis pts for the quarter -- 25% of 0.20% = 0.0005).

We will track this index vs a hedge fund index since both are global and involve many different kinds of assets.    Below is the comparison up until March 27 --- note that hedge fund reporting is lagged by 1-2 days --- but in this case, not much happened on the last day anyway so these figures are very close to the final figures:

 

 

Think about this another way,  assume a 1.5% expense ratio and 15% performance fee on average for hedge funds in the HFRX index.    If the ETF 100 benchmark goes up +10% this year net of the 0.27% blended expense ratio,  in order for the hedge fund index to MATCH this number -- it has to first rise +13.5% just for investors to make that same 10%. In order to substantially beat that figure and actually add value for the investor, it will have to do far more than that. Given the extremely low volatility of the hedge fund industry, that seems a tall order for 2013. This leads us to postulate that the only way for hedge funds as an industry to actually add material value vs this index is if something like the ETF 100 index drops materially. The primary way for this to happen would be if large cap US stocks dropped materially. Even then, the cushion of fixed-income in the index would dilute the impact of the fall.

 

 

 

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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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