ETF-only Portfolio

As an young adult who works in financial market, I can’t “buy and sell” individual stocks on the right time. That means I have to manage my personal portfolios that are not under regulations, and ETF is a good investment product for that purpose.

Yes, it is true that ETF is a boring investment: you can’t see very dynamic price movement, nor can you see great return (like, 50~100% return per year) from ETFs. However, George Soros once said, “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” Yes, while my investment has a serious upper bound (let’s say, 30% as a limit with 95% probability), it also has much more strict lower bound (-5% with 95% probability, and this is when the market is quite bad). And since I can’t be sure what specific stocks I am buying, there is much less emotion to play in my investment, not to mention reducing volatility in daily return, while achieving handsome return (10% historically).

Also, there are so many different types of special ETFs that you can customize your ETFs just like an active portfolio, while maintaining benefits of ETFs (minimal cost, diversification and timely automatic portfolio rebalance). Currently, there are 239 equity ETFs and 80 bond ETFs offered by BlackRock alone. 65 of the 239 equity ETFs are country-specific, and 57 of them are sector specific. Most of the investors’ needs can be met my these products.

When it comes to personal investment, I am almost allergic to management fees. Yes, it is a good source of income for professional investors, but knowing the fact that 80% of active portfolio mangers underperform their benchmark (S&P 500 for most of them) for a long time  – say, 10 years, makes me hard to justify the fees I have to pay for portfolio managers. For that reason, ETFs are good source of investment vehicle – Vanguard ETFs are charging investors mostly under 25 bps. Their S&P ETF charges 4 basis points, and their sector / style ETFs (which I am about to buy) charge 10 bps at most. Also, if I have vanguard account (which has no maintenance cost if I have over $10,000 balance in  my account), there is no commission fee (trading fee) in buying / selling their ETFs.

So, here is what I suggest: build core part of your portfolio with low index ETFs. Pretty much all major ETF providers (BlackRock iShares, Vanguard, Fidelity, and Charles Schwab, to name a few) can do this job. Since I am working at BlackRock, I can’t be objective, but I think BlackRock and Vanguard can offer very competitve and good products. When I say core parts, I meant blue-chip stock ETFs, such as IVV.

When it comes to the U.S. sector ETFs, Vanguard is better. Yes, BlackRock and other firms also have such products, and actually BlackRock iShares has the lowest tracking errors (TE)and possibly replication ratios(RR)  than its competitors’ products. However, for index funds, I think these small differences in TE or RR are meaningless after certain thresholds. On the other hands, iShares charge more than Vanguard sector ETFs. iShares charges 35~48 bps of management fees, but Vanguard charges ~10 bps of fees. I am honestly not sure how much they are different in hidden fees, but as long as I know of, Vanguard is better in cost perspective in the U.S. sector ETFs.

On the other hands, BlackRock is probably the best and the only provider of a variety of country ETFs. I am pretty sure no other firms can match iShares coverage around the globe, and this makes why iShares is the best suite for me in personal investing. Think about Korea, India, and France. There are not many ETFs that you can access to these local markets unless you invest in mutual funds, and I know mutual funds are not the optimal choice for many reasons. BlackRock iShares cover most of the major countries, developed or developing, enhancing your active market views. Sometimes it works, and others don’t, but assigning small portion of your investment in these vehicles does make difference in your portfolio performance.

For example, I heavily over-weighted Europe in early April, when I started my personal investment. I was pretty sure Macro will win, and the odds were in favor of me, but investors were still scared to bet on French elections; after watching Trump as the new president and Brexit was passed by the British, nothing was a “Sure bet”. and by early May, IEUR (a European ETF) achieved more than 10% of return since April 11th. This helped me to beat S&P 500 by full 1% and close to 2% if I count in the dividends from ETFs. Considering that this happened in just 1 quarter, and most active investors have trouble beating S&P 500 for a long term, this ETF investment approach has a more than enough potentials.

I wrote Q3 portfolio adjustment, but I will make another proposal, this time with Vanguard ETFs for sector specific bets.

I hope this helps for you to understand the potential of ETF based investment.






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