The S&P 500 (SPX) recovered on Friday, but after last minute selling, much of its gains for the ...
S&P's Model Portfolio for ETFs
11/26/2004 12:00 am EST
"With exchange-traded funds becoming more popular with investors, we decided to construct an ETF-based portfolio that can be used to follow our asset allocation advice at Standard & Poor’s," says analyst David Braverman in The Outlook. Here's his ETF model portfolio.
"We have selected ETFs that will give investors the broadest possible diversification at the lowest possible cost. And while this portfolio will be adjusted whenever our Investment Policy Committee makes a change in our recommended asset allocation, we intend the portfolio to have low turnover. The portfolio is designed for investors who have at least a five-year investment horizon.
"We currently advocate a 45% position in US stocks. To achieve this allocation, we suggest a 37% weighting in the S&P 500 SPDR (SPY ASE), an ETF that focuses on large-cap stocks; a 4% weighting in the S&P 400 MidCap SPDR (MDY ASE); and a 4% weighting in iShares S&P SmallCap 600 (IJR ASE). The US market as a whole is dominated by large-cap stocks. That is why our US stock recommendation is also dominated by a large-cap weighting. Also, we anticipate more investor interest in high-quality, large-cap names going forward. Over the three years ended September 30, the S&P 500 SPDR posted an average annual return of 3.6%, the mid-cap ETF 12.1%, and the small-cap fund 15.6%.
"We currently advise a 15% allocation to foreign stocks. This should provide exposure to all parts of the world, including emerging markets. Specifically, we recommend holding 9% of your portfolio in iShares MSCI-EAFE (EFA ASE), which invests in stocks that trade in Europe, Australia, and the Far East, including Japan. It had a three-year average annual gain of 9.1% through September 30. Because of the growing influence of Asian countries and companies, we also advocate a 4% allocation to iShares MSCI Pacific ex-Japan (EPP ASE), which attempts to track the price and yield performance of publicly traded securities in the Australia, Hong Kong, New Zealand, and Singapore markets. We believe that investors should not overlook the diversification and return benefits that can come from investing in emerging markets. However, we are also aware that these markets are more volatile than those in the developed world. Thus, we advise holding only 2% of your portfolio in emerging markets, preferably in the iShares MSCI Emerging Markets (EEM ASE).
"On the fixed-income side, our current allocation is 25%. We recommend short- to intermediate-term bonds only. Specifically, we would put 15% in iShares Lehman Aggregate (AGG ASE), which seeks to emulate the broad fixed-income market. This recommendation is consistent with our thesis that the best fixed-income instruments for today’s market are short- or intermediate-term. The average maturity of the holdingsin this ETF is 6.3 years. We further suggest a 10% position in iShares Lehman 1-3 Year Treasury (SHY ASE), which tracks the short-term sector of the US Treasury market. For the 15% cash allocation, investors may use money market funds, which are completely liquid, in lieu of six-month Treasury bills."
For your convenience, we present the full ETF model portfolio below:
45% U.S. Stocks
37% in Large-Cap Blend S&P 500
SPDR (SPY ASE)
4% in Mid-Cap Blend S&P 400 MidCap SPDR (MDY ASE)
4% in Small-Cap Blend iShares S&P SmallCap 600 (IJR ASE)
15% Foreign Stocks
9% in International iShares
MSCI-EAFE (EFA ASE)
4% in Pacific iShares MSCI Pacific ex-Japan (EPP ASE)
2% in Emerging Markets iShares MSCI Emerging Markets (EEM ASE)
15% in US Debt iShares Lehman
Aggregate (AGG ASE)
10% in US Short-Term Debt iShares Lehman 1-3 Year Treasury (SHY ASE)
15% in Cash US 6-Month Treasury Bills
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