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Don’t Get Too Cute With Your ETF Portfolio

By: Pete | Date posted: 04.19.2013 (2:04 am)

I continue to work on building some interesting and efficient ETF sample portfolios and always find it interesting to see things change a bit over time. Sometimes it’s about a new type of ETF being created (such as the WisdomTree emerging market bond ETF) and in other times it’s mostly about switching from one ETF to a similar one that has less tracking error, less fees, etc.

Today, I was reading about a new retirement portfolio that was created by CNBC for 30 year-olds. One of the portfolios they built is for 30 year-olds and you can see what’s included:


SPDR S&P 500 (NYSEArca: SPY) 17.5%
Schwab U.S. Dividend Equity (NYSEArca: SCHD) 7.5%
Vanguard Mid Cap (NYSEArca: VO) 5%
First Trust Health Care AlphaDEX (NYSEArca: FXH) 5%
Vanguard FTSE All-World ex-US (NYSEArca: VEU) 17.5%
WisdomTree Emerging Markets Equity Income (NYSEArca: DEM) 5%
EGShares Emerging Markets Consumer Titans (NYSEArca: ECON) 7.5%
PowerShares S&P International Low Volatility (NYSEArca: IDLV) 5%
According to the CNBC ETF Advisory Council guidelines, the portfolio can hold 2 “core,” broad-based ETFs – in this case, one domestic and one international.


iShares Core Total U.S. Bond Market (NYSEArca: AGG) 2.5%
WisdomTree Emerging Markets Local Debt (NYSEArca: ELD) 2.5%


PowerShares Senior Loan Portfolio (NYSEArca: BKLN) 5%
Market Vectors Gold Miners (NYSEArca: GDX) 5%
Vanguard Global ex-US Real Estate (NYSEArca: VNQI) 5%
Peritus High Yield (NYSEArca: HYLD) 5%
PowerShares DB US Dollar Index Bullish (NYSEArca: UUP) 5%

So basically, this portfolio holds 15 different ETF’s with weights between 2.5% and 17.5%. I honestly don’t like it very much. Why? It’s trying to be “too cute”.  A retirement portfolio that is invested in ETF’s should be fairly simple in most cases. You generally want domestic and foreign equities (3-4 ETF’s) and fixed income (1-3 ETF’s). Yes, it’s possible to want exposure to other asset classes such as real estate or commodities… but 15 ETF’s? How could adding a US Dollar index be justified? It’s nice to mention it in a conversation but I don’t see the point honestly.  If a 30 year-old has 50K to invest, is he expected to put $1250 into a US dollar ETF? Really?

ETF Retirement Portfolio Is Supposed To Be Boring

I personally have my ETF portfolio but also have other more speculative/stock picking investments. So I’m more than happy with a boring, 6-7 ETF portfolio that will do well over time. If you’re looking to make specific picks, set yourself some other type of portfolio that can be more actively traded. Don’t take a 30 year bet based on some gut feeling… that defeats the purpose of such a portfolio.

How I Helped My Brother Take Control Of His Finances Through ETF’s

By: Pete | Date posted: 03.04.2013 (2:29 am)

Many of you might relate to this story. My brother Frank was in his late twenties with a decent job and nearly 60K saved away in savings. Because he’s uninterested by financial markets, he had never really taken the time to even consider doing anything else than what he had been recommended by his financial planner. After all, that person knows this stuff so much more than Frank so he had assumed that his portfolio was as good as it could be. I guess in some ways it was.

Only The Rich Get Top Financial Advice

The fact is that most planners have some kind of vested interest. They might not charge you an upfront fee but they do need to get paid so they end up selling investments such as mutual funds that kick back to them (or their employer) a portion of the fees. It’s logical because the alternative is usually for brokers/planners to charge a % of assets, usually 1%. The problem is that for someone who owns $50,000, that amounts to $500. Not that it’s bad but if you account for time spent, employees, and all other costs, it makes no sense to offer the service for that little. So instead they go for funds that can send back a % of assets which:

-over time generate money
-are very easy to manage

In my brother’s case, he had a fairly simple portfolio. He owned one mutual fund that owned several others giving him a very balanced portfolio at a 1.50% annual fee. It’s not terrible; especially when you consider that many other funds charge twice that amount or more. The fund had solid historical returns and was aggressive enough to match Frank’s investor profile. It made a ton of sense.

Then I Started Investigating…

Obviously, one of the benefits of trading mutual funds is that there are usually no “execution fees” so you can go in and out of funds and invest every month without incurring any costs.

An ETF portfolio on the other hand generates commissions every time a trade is done.. that fee is fixed (between $5 and $20 per trade depending on your broker).. There is also a very limited fee of 0.20% at most (for an average fund)

So you can either pay more annual fees or more commission? Which is better? Depends on how much money you have.

A few brokers have even started offering free ETF trading making the comparison even easier. But for today’s comparison, let’s say that my brother was paying $7.95 per trade.

Can Fees Matter That Much?

I’ve written about this but yes, they do. Let’s compare the returns of both portfolios over 40-50 years… with the following assumptions:

-Returns before fees are identical (6.5%/year)
-The mutual fund portfolio has 1.50% of fees which becomes 1% once he reaches 100K in assets
-The ETF portfolio has fees of $96/year (1 trade per month) except for that first year where more trading is necessary to get it started $200.
-My brother reinvests $15,000 per year (for simplicity’s sake, it’s done at the end of the year)

So basically, from the very first year, my brother is ahead and the difference grows larger every year as the fees difference becomes more significant. In the end, it makes a difference of over $1M…!! Why is it so big? Not only is there a huge difference between $100 of trading fees and a 1% charge but that difference is reinvested for 10-20 years or longer. It’s a HUGE difference in the end.

What I Did Next

I arranged a meeting with my brother, showed him the numbers and explained the concept. It’s difficult to argue with that much of a difference. Especially since there are other benefits involved (knowing and understanding what you’re investing in is the main one).

His Biggest question as you can imagine was.. how much time would this take me? I answered.. the initial setup will take a few hours and then about 10 minutes per month. Think I’m exaggerating? Not at all! Here was the todo list:

-agree on the portfolio profile (the ETF’s used, weights, etc)
-open a brokerage account
-sell mutual fund positions
-transfer the money to the new brokerage account
-setup an automatic transfer to be done at least monthly
-setup a spreadsheet that would give him trades to execute (see this example)
-every month, take a look at any trading that needs to be done
-on a yearly basis, review target weights for each ETF

It ended up taking a while but he did make the change about 6 months ago and has overperformed the fund he owned by almost 1% (basically the fees over a half year).

Based on all of this, I’m trying to see why or how someone could not want to go down this route.. am I missing something? What are you waiting for if you have not tried already?

ETF’s Volume Does Not Equal Liquidity

By: Pete | Date posted: 01.14.2013 (4:00 am)
There exist many misconceptions about ETF’s and this is a major one that I wanted to discuss today. When trying to find the best possible ETF for your portfolio, many different things need to be looked at. One of them is liquidity of course. An important thing to avoid is losing money every time you trade because of the spread.

It Is An Indication But…

Yes, volume is certainly one indicator that you can look at but it would not be the main one. Ideally, you want to trade ETF’s that have very small bid-ask spreads $0.02 or $0.03 at most. The other thing you want is to trade stocks that have a lot of size available at those prices. The spread could be $0.02 but with only 100 shares on each side which would not be good. Why? Because let’s imagine the ETF has the following market:
If you want to buy 1000 shares, it makes a huge difference if you are able to buy it all at $10.02 or if you end up paying some at $10.04. The easiest way to see this if you can’t access pro tools such as Bloomberg is through your broker. You can either ask or look at their online tools.
In many cases, the volume gives you no idea. For example, if you look at 2 ETF’s:
Both track the S&P500 and SPY has many many times more volume. But both have identical liquidity unless you’re buying tens of millions of dollars (maybe even then). Why? Because those that offer to buy and sell VOO are doing it by trading against futures and stocks so I would personally prefer owning VOO which charges slightly less (0.05% vs 0.095%). There are other instances where some ETF’s that almost never trade have almost unlimited liquidity.

What Makes An ETF Liquid?

This is a very interesting question. ETF issuers have brokers that provide liquidity on ETF’s. How do they do it? They calculate the actual value of the fund. If the value is $10.00, they might offer to buy for $9.99 and sell for $10.01. In the case of the S&P500. They would buy the ETF and sell the S&P500 (in a number of ways). That way, the market maker is able to “lock in” profits. It becomes very important for the market maker to be able to:
-easily calculate the value of the fund
-hedge any risk by trading the underlyings
You can imagine how an ETF that has bank loans as underlyings (BKLN) would not be as liquid.

I’m Glad To Help Out

If ever you’d like to find out how liquid an ETF might be, I’d be glad to help out for sure! Just ask me

What Happens When An ETF Shuts Down?

By: Pete | Date posted: 12.15.2012 (8:07 pm)

I generally tend to invest in very liquid ETF’s with significant AUM’s. Those ETF’s do not close because they are profitable for the issuers. In the rare cases where they are not, the fees might be increased a bit (I have not seen an example of this). So for the vast majority of ETF’s, especially the ones that I personally recommend, this is not something that would happen.

That being said, some ETF’s do end up closing, especially in the past few months. Why? The biggest reason is that a big part of an ETF’s success is “first to market”. ETF’s like SPY and EEM are not the cheapest (the best) but they were there first, have tremendous names and liquidity. Knowing that, ETF issuers tend to launch dozens of ETF’s as experiments. They will try them out, see how well they do and can close them down if those end up not working. Some issuers resist the idea but others see it as part of the business.

When An ETF Closes

The issuer will do a few things.

-It will send out a press release announcing the closing
-It will advise all shareholders of the closing date (generally several weeks later)

Between the moment the shareholder finds out about the closing and when it actually occurs, shareholders will have 2 choices:

-sell those units in the market: this can work well but it’s better to be careful. Why? Because once a fund announces it is closing, the market makers might not be able or willing to offer fair markets. If the spread remains small, chances are that you are good to go

-wait until it closes: Once a fund closes, the issuer will buy back the units from you at the actual value or NAV (net asset value) so a few days later you will receive the money.

One thing to pay attention to: In some rare instances, issuers will decide to merge a closing fund into another more successful ETF. That would perhaps be a good alternative but you’ll have to verify the new ETF (description, index, fees, etc)

In The End

It’s not the end of the world by any means if an ETF that you own ends up closing. That being said, it’s still a good idea to make sure you know what’s going on when you get such a notice to avoid bad surprises.

Has this ever happened to you?

ETF’s With A Currency Hedge…Or Not? You Have To Nail This One…

By: Pete | Date posted: 11.05.2012 (4:00 am)

I’ve gotta admit, this one drives me insane. Selecting an ETF doesn’t take a rocket scientist and it’s not a month long process. But if you’re not going to take 10-20 minutes to make sure that the ETF you will count on for your retirement is tracking what you’re looking for, then you might as well go pay out those high management fees and end up paying tens of thousands of dollars (or a lot more) in fees. Why? Because it’s the core of building an ETF portfolio.

One Great Example

In almost any dividend portfolio, international assets will occupy a decent weight. Why? The top benefit is diversification which I would describe as being able to generate additional return for the same level of risk. It’s a no-brainer when you think about it. That does not mean you will always outperform someone who does not have international ETF’s. However, over long periods of time, you will end up a winner more often than not. It’s the same reason why most of us prefer to buy an ETF that tracks the S&P500 rather than buying 1 or 2 stocks that we have great belief in.

International markets react differently than domestic ones which creates the diversification. Another aspect though is the currency. If you hold an ETF that tracks Australian stocks, chances are that you’d also like to have exposure to the Australian dollar! Why? Same reason, it gives you more diversification than an Australian ETF that has a currency hedge.

If You’re Not Convinced Yet

Just in case you’re still unsure, I do have one more argument. Currency hedging is tricky for ETF’s and because of that fund managers have historically struggled with hedging correctly which has created more tracking error and more fees.

What Do You Hold?

Have you purchased any international ETF’s? If so, I hope you know if they are currency hedged or not? What do you generally prefer? I know that some investors disagree but I’m personally convinced that almost all investors should hold ETF’s that DO NOT currency hedge.

An ETF Is NOT The Same As An ETN

By: Pete | Date posted: 10.21.2012 (4:00 am)

There continues to be a lot of confusion regarding exchange traded products. I personally blame regulators who should force issuers to clearly explain their products and the differences. Take the case of ETN’s for example. When you hear about them, you’re likely to hear about exchange traded products rather than exchange traded notes and I would imagine that a big reason why is the fact that investors tend to confuse those with ETF’s.

It’s Not That One Is Superior To The Other

Both ETF’s and ETN’s have their own benefits and downsides and I don’t think there’s anything wrong with trading both. One key though is understanding the difference between the two products. In just a few words, here is how I would describe the two:

ETF: you own specific assets that attempt to track what is generally an index and in theory you could exchange those ETF units against an equal value of the underlying assets which are held by a custodian

ETN: you own a debt security issues by a specific bank. The bank promises to deliver the return of a specific return. The main benefit is that you get the exact return without any tracking error while the downside is that you own debt. You become liable if ever that bank goes into bankruptcy as was the case with Lehman Brothers some time ago. The risk remains small if you choose and diversify the counterparties that you’ll end up dealing with.

I personally do not own any ETN’s in my portfolio but it could happen at some point. I don’t really see how at this point since all of the asset classes that I’m looking for exposure on are offered as ETFs with minimal annual fees. It could happen though at some point that I’d look to get exposure to commodities or other sectors covered by ETN’s. If that does end up happening, I doubt that I would ever have more than 10% of my assets in ETN’s from one specific issuer, perhaps even less.

Have you ever purchased an ETN? If so, which one and do you care if it’s an ETN or ETF?

Commission Free ETF Trading, Fact Or Reality?

By: Pete | Date posted: 10.05.2012 (12:37 am)

Both in Canada and the US, several brokers are able to offer commission free ETF trading. Several brokers such as Firstrade, TD Ameritrade and Fidelity offer this in the US. Basically, such brokers offer the ability to buy and sell a select group of ETF’s, free of charge. If you are considering building a long term ETF portfolio, it is very possible that this is something worth looking for. The main things I’d look for are:

-the list of the ETF’s that can be traded free of commission
-how those ETF’s compare to competing products

For example, Fidelity offers commission free trading on EEM which is good but has been an inferior offering compared to VWO for example which is offered commission free on TD Ameritrade. I don’t think you need to always have the best ETF but it’s worth trying to look for the best fit depending on how active you’ll end up being as well. Just as an example, here are the ones offered by Fidelity:

You can also see the even better list offered by TD Ameritrade:

As you can see, you are able to access ETF’s from virtually every asset class, free of charge, which can make a bug difference, especially for smaller size portfolios where the commissions can end up having an impact on returns.

How This Is Possible

If an ETF such as SPY is trading at the following market:

Bid: 145.12
Offer: 145.13

What the broker will do is offer you to buy for free at 145.13 and sell at 145.12. The goal is for the broker to make a small profit on each trade, especially when clients are trading both sides.

So yes, sometimes free really does exist

How Can ETF’s Be So Cheap – Too Good To Be True?

By: Pete | Date posted: 09.26.2012 (1:43 am)

Last week, I received an email about reduced fees for the Charles Schwab ETF’s. Not much news about that as it seems like all issuers are gradually reducing those. What did catch my attention though is how low they’re taking their fees to. For example, both their US Broad market and US Large-Cap ETF’s will now carry a 0.04% annual MER. Yes, you read that right. That is about as close as you can get from 0. Just take a look at the fees they will be charging on their ETF’s:

U.S. Broad Market 0.04%
U.S. Large-Cap 0.04%
U.S. Large-Cap Growth 0.07%
U.S. Large-Cap Value 0.07%
U.S. Dividend Equity 0.07%
U.S. Mid-Cap 0.07%
U.S. Small Cap 0.10%
U.S. REIT 0.07%
International Equity 0.09%
Emerging Markets Equity 0.15%
International Small-Cap Equity 0.20%
U.S. Aggregate Bond 0.05%
Short-Term U.S. Treasury 0.08%
Intermediate-Term U.S. Treasury 0.10%
U.S. TIPS .07%

Too Good To Be True?

I’m the first one to say that when it seems too good to be true, it usually is, especially when it related to finance and the markets in general. That being said, this is one case where it’s not. First off, I’d like to state that while those rates are the cheapest on the market, many others such as Vanguard are awfully close and offer several ETF’s at less than 0.10% per year. Schwabb did take it one step further than anyone else had done in an attempt to gain market share.

How Is It Even Possible To Offer Such Rates?

I was asked by a good friend of mine how it was even possible to offer such rates. Are they losing money? Let’s take what I know to be an extreme example:

SPY is the largest US ETF and charges 0.095% per year. With its current assets of $120B or so, that amounts to about:


Yes, you read that right. They then need some staff to do marketing, accounting, trades, etc. Let me tell you, it is a hugely profitable fund. In fact, it could be many many times smaller and still be worth it. If you’re trying to understand, just think about the following:

How many mutual funds have a fund that more or less tracks the S&P500? Start by thinking about banks, brokers, insurance companies and all of those other ones that all have their own fund. You’d get to thousands of different ones. Then, take those funds and start moving them into a couple of dozen (maybe a bit more) huge ETF’s. You will see how the economies of scale become very important. That is also why the only thing keeping the mutual fund industry alive is the fact that most investors don’t know how much they’re paying for them or can’t/won’t look for better alternatives.

I’m not sure if it can get much lower but I would argue that fees will continue to decline in the ETF space as was the case for trading commissions in the past decade. It won’t get to 0% but we’re getting closer and closer aren’t we?

With all of that in mind, which smart investor would ever pay 2-3% again for a standard passive fund?

ETF’s… Are Fees The Only Thing That Matters?

By: Pete | Date posted: 07.19.2012 (1:58 am)

Earlier today, I was reading an article about how iShares is losing market share in the ETF space. It remains the biggest player but Vanguard has been increasing its AUM (assets under management) several times faster than iShares in the past 2 years or so. Why? It seems to come down to only one thing. “Fees”.

How Much Do Fees Actually Matter?

I think the importance of fees cannot be overestimated. I wouldn’t go as far as saying that it’s the only thing that matters but it’s fairly close. After all, one of the two main reasons why ETF’s have gained so much popularity is because they charge fees that are so much lower fees than competing mutual funds (the other one being that they trade intra-day). So if you are going to switch from a mutual fund that charges 1.50% to track the S&P500, then why go for an ETF that is not charging the lowest MER? There would be no point…

Exactly What’s Happening….Vanguard Crushing iShares

For most big ETF’s that iShares has, Vanguard was able to launch a competing product that charges a fraction of the cost. The best example is EEM which tracks the MSCI Emerging Markets index. It charges 3 times more than the competing VWO from Vanguard which tracks the same index. There are very few reasons why someone would be holding EEM instead of VWO and while it did take several years, VWO went from a tiny competitor to finally overtaking EEM in terms of AUM.

There Are Exceptions..Why You Would Not Buy The Lower Fee ETF…

In most cases, it makes perfect sense to go for the cheaper alternative but there are exceptions or things to look out for, here are the main ones in my opinion:

1-Liquidity: In the earlier days, VWO probably had a lot less volume which could end up meaning wider spreads, especially on more volume. Such “hidden costs” can end up meaning a lot more than what you are saving in fees. It’s true that EEM still trades a lot more than VWO (in terms of volume), but both trade with a $0.01 spread so there is no need to go for the more liquid name. If there is a clear winner, I would usually go for the more liquid name even though the MER might be a bit more expensive.

2-Derivative: Many traders have trades related to the ETF they own. For example, if you are trading options on EEM (which are much more liquid than options on VWO), you’ll be much better off trading EEM because they might not (especially on indexes that are difficult to track like the MSCI Emerging Markets index) perform exactly in the same way.

3-Different Index: Some ETF’s look similar but are actually very different and it’s important to understand what an ETF owns or what it tracks before jumping ship. For example, IVW tracks the S&P500 growth index which is NOT the same thing as the S&P500. It’s important to be sure of what you’re buying.

In your experience with ETF’s, have you generally gone for the cheaper one? When not, why?

A Dividend ETF Worth Looking Into (DTN)

By: Pete | Date posted: 07.11.2012 (2:53 am)

Many of you have decided to build an ETF portfolio in order to simplify your life, to improve the overall returns by diminishing returns. Often, all of those (and many others) benefits come at a cost. One such costs is control over what the ETF’s that you hold end up owning. In many cases, the ETF only holds the underlying index such as an ETF like SPY which holds the 500 stocks in thee S&P500. But in other cases, the ETF’s have some level of choice in what securities they end up buying.

That is the case for most dividend ETF’s that either buy their own selection of stocks or have a custom built index that they track. I know many of you are looking for income in your ETF portfolios and clearly holding dividend ETF’s is a popular way of doing so.

One of the things that I have not liked about such ETF’s is the fact that many hold so many financial stocks. In a period like the current one, with Europe on the brink of a collapse and the whole economy struggling so much, financial/bank stocks don’t seem like the best play. There are so many dividend stocks out there that are easier to understand, have much clearer balance sheets and have less risk of imploding if things go wrong. I personally would underweight financials in any dividend portfolio that I’d hold, if I bought any at all.

This morning, I read about DTN, a Wisdom Tree Dividend ex-Financial ETF. That is exactly the type of ETF that makes a lot of sense to me and one more reason why having a few thousand ETF’s available makes a lot of sense. I’m more than happy to have a few more options when shopping around for dividend ETF’s and this is one that I personally like a lot. Here are a few numbers for DTN:

TickerNameMarket CapPriceReturn YTDFeesDividend Yield
DTNWisdomTree Dividend Ex-Financials Fund $1,076,958,007.81 $53.585.010.383.52

And you can also see a few alternatives:

TickerNameMarket CapPriceReturn YTDFeesDividend Yield
VIGVanguard Dividend Appreciation ETF $11,031,980,468.75 $56.514.480.182.13
DVYiShares Dow Jones Select Dividend Index Fund $10,378,125,000.00 $56.256.570.43.46
SDYSPDR S&P Dividend ETF $9,068,790,039.06 $55.334.280.353.24
VYMVanguard High Dividend Yield ETF $3,648,153,076.17 $47.877.330.182.88
HDViShares High Dividend Equity Fund $1,700,270,019.53 $59.459.090.42.92
DLNWisdomTree LargeCap Dividend Fund $1,153,195,678.71 $52.187.900.282.8

That is it for now, as always, I appreciate any feedback regarding your experiences with building an ETF portfolio!