Which ETFs do I recommend for different asset classes when putting together that first portfolio? The first move is to decide which asset classes to use. Twenty-five months ago I posted this Asset Allocation blog and little has changed over that time. One error in the table is the position of VEA. That ETF should be included in the Developed International Equities box rather than the Emerging Market asset class. Since posting this asset allocation table I added a Precious Metals asset class to several portfolios. Another change is that I no longer use mid- and small-cap blend (VO and VB) as those asset classes are covered by the value and growth ETFs. This cuts the number of U.S. Equity asset classes from nine to seven. A strong argument can be made that the “Big Nine” (now “Big Seven”) are highly correlated and one only needs VTI to cover all U.S. Equity asset classes. If you want to simplify your portfolio or if it is rather small, use only VTI for U.S. Equities. However, I’ll continue to use VTI, VTV, VOE, VBR, VUG, VOT, and VBK as the primary representative ETFs for the U.S. Equities market.

**This material is not available for publication elsewhere on the Internet.**

The remaining nine asset classes are: Cash, Domestic Bonds (BND), Developed International Markets (VEU), Emerging Markets (VWO), U.S REITs (VNQ), International REITs (RWX), International Bonds (BWX), Commodities (DBC), and Precious Metals (GTU). While these are the primary ETFs used to calculate the ITA Index benchmark, I hold other ETFs in different portfolios as well as a few individual stocks. For example, I don’t limit bonds to just BND. Other bond and income ETFs include BSV, BIV, AGG, JNK, LQD, TLT, TIP, SHY, etc.

As stated many times on this blog, the second decision of what percentage to allocate to each asset class is the most difficult decision facing investors. If one follows the Momentum-Optimization Model, and you are satisfied with the constraints applied to the different asset classes and individual securities, it is possible to receive help with this difficult decision through the optimizer.

Here is the link to a series of articles on Dynamic Asset Allocation or Adaptive Asset Allocation. I believe I referenced this second article in a prior blog.

Here is the latest ranking of ETFs I use to populate most of the portfolios tracked here at ITA.

Thank you, Lowell. I hadn’t seen that previous post on asset allocation yet, even though I have been browsing through old posts. That post and this one are very helpful as I am trying to collect information to get an idea on how construct my first portfolio as I continue my reading. I am still lost on what I will use for percentages but hopefully I will get a better idea as I continue my reading. I started a spreadsheet that lists the 18 asset classes from one of your previous posts. I will add these ETFs to it for reference.

Dawn,

Fine. If you have more questions, just ask. Perhaps the update of the Kepler near the end of the week will be useful in selecting percentages to invest in asset classes. I’ve been reading a number of articles that indicate asset allocation is less important than once thought and what one needs to do is adapt more to market changes. That is where the momentum study should be helpful.

Lowell

Vanguard has a tool that allows you to develop a portfolio based upon your response to a series of question. The portfolio I get is VTI (42%), VXUS (18%), BND (32%) and BNDX (8 %). Have you every evaluated these?

Thanks

Jerry

At the risk of giving away my complete financial illiteracy, I would like a brief explanation of what each of the columns mean in the chart above. I see this chart a lot on here and still don’t know what I’m reading. Maybe just a keyword for each column and I can look it up from there.

The momentum study is another area where I am still lost. I am learning more each day so I have confidence that I will understand most of it, eventually. Small chunks!

Jerry,

Yes, I’ve evaluated what I call “canned” portfolios. If readers take the Risk Capacity Survey over at https://www.ifa.com/ you will be slotted into one of 20 portfolios. I’ve analyzed many of those combinations and I’ve not been overly impressed. I’ve found those portfolios, in general, are too conservative, particularly if one is older. For example, if one is 65 or older you will end up with a much higher percentage in bonds. What those portfolio calculators don’t take into consideration are the high risks associated with holding bonds at this time. While interest rates may stay done for many months, eventually rates will rise and when that happens I want to be out of bonds. I’ll admit there are also risks in equities right now considering this high market.

Lowell

Dawn,

Column #1 is the ticker of the symbol that identifies one ETF from another.

Column #2 is Beta or a measure of how much the ETF moves with respect to a standard, frequently the S&P 500. For example, a Beta of 1.1 means the ETF will move either up or down 10% faster than the S&P. If the Beta is 1.03 it will move 3% faster, either up or down. A beta of 1 indicates it will track the S&P 500 or whatever the benchmark.

Column 3 is the current price or the price of each ETF (or security) when last updated. That was yesterday for this table.

Dawn,

Column 4 is the price of the security 91 days ago. I can change the number of days but we use 91 days to represent 3 months.

Column 5 is the percent gain or loss over the last three months or 91 days in in this example.

ROC1 is the ranking based on Column 5.

Now over to Volatility. This is the Standard Deviation of the security over a specified period. See the number 10 just above. The spreadsheet permits two choices. 10 or 20 days. I usually use a volatility of 10 days. We are interested in stocks that have low volatility. While this spreadsheet does not have the capability to measure only downside volatility, that is what we would prefer as we don’t care if an investment has volatility to the upside. In fact that is what we want to happen as we are rooting for our investments to go up. Dog asking to go out so will be back with more answers.

I had figured out columns one and three. I am guessing that ROC1 is the rate of change in the last 3 months and ROC2 the last 6 with the 91 and 181 being the prices for those times. I am not sure how about the weighted column or rather how they are weighted. I don’t know what the EMA column means. I get the momentum column and just need to learn more about the momentum study. I also understand the volatility but am not sure how that’s calculated or if there is some magic number I should stay below.

The Weighted column (#12) takes into consideration the performance over the past three months (50% weight), past six months (30% weight) and volatility (20% weight).

The EMA stands for Exponential Moving Average. That is explained in great detail elsewhere in the blog. Search on Smoothing Constant and you might find the explanation quicker as there are many blogs that contain EMA.

Momentum is a little more complicated, but it basically tells us relative 3-month performance vs. the six-month performance. The number one ranking security does not always have the highest momentum.

Sorry, I replied to the first one before reading this one. I think I get it now. I didn’t know that the volatility number was a std dev. Thanks.

Volatility, risk, and standard deviation are frequently used to mean the same thing – although risk has many different meanings.