Samples of asset allocation with ETF's

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prinx
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Samples of asset allocation with ETF's

Post by prinx » Fri Oct 31, 2008 5:41 pm

Is there a source, book or site that has some samples of various AA of ETFs?
Burt S

livesoft
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Post by livesoft » Fri Oct 31, 2008 5:58 pm

There are many. You can read Rick Ferri's The ETF Book, go to www.fundadvice.com for their sample ETF portfolio or go to the more dated http://seekingalpha.com/article/15134-t ... ting-guide
or search with google.

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prinx
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RE: Samples of ETF Portfolio, Thanks Livesoft

Post by prinx » Sat Nov 01, 2008 9:39 pm

Thanks Livesoft .
Those were excellent selections. I purchased Ferris book today and it is very comprehensive and scholarly. I am now wondering if it would be more useful to puchase his book on asset allocation. Frankly I am going to harvet losses from Mutual funds and I want to stay in the market . So I plan on purchasing an ETF portfolio. So I do need to have the practical aspects as well as the theory.
Do you think Larry Swedoes book would also be helpful? Have you read Ferris book on Asset Allocation? Any knowledge or thoughts on the ETF Guide portfolios?
Burt S.

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Post by livesoft » Sat Nov 01, 2008 9:52 pm

I found Ferri's "All About Asset Allocation" less dry than the ETF book and more informative, but a colleague of mine could not get through it at all. It was totally confusing to her.

Also take a look at the writings at www.altruistfa.com

And to add: there is really nothing special about an ETF portfolio viz-a-viz a portfolio of mutual funds with the same asset classes. To wit: figure out your asset allocation without regard to what the actual investments might be, then fill in the iinvestments any way you want to fulfill that AA.

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Re: RE: Samples of ETF Portfolio, Thanks Livesoft

Post by YDNAL » Sat Nov 01, 2008 10:02 pm

prinx wrote:Frankly I am going to harvet losses from Mutual funds and I want to stay in the market . So I plan on purchasing an ETF portfolio. So I do need to have the practical aspects as well as the theory.
prinx,

Be careful if you think an ETF means you are buying something different that a mutual fund.

The ETF is a different share of the same fund. So, if you exchange one for the other you will buy significantly the same fund and violate the IRS rule if you are trying to TLH.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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CABob
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Post by CABob » Sun Nov 02, 2008 4:05 pm

The ETF is a different share of the same fund. So, if you exchange one for the other you will buy significantly the same fund and violate the IRS rule if you are trying to TLH.
True in the case of Vanguard mutual funds and ETFs, but, not necessarily in the case of other companies.
Bob

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prinx
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Post by prinx » Sun Nov 02, 2008 4:16 pm

With regard to the ETF vs open index funds. It seems to me from what I gathered form the forums. ETFS
pros
1.more tax efficient ( very important to me)
2.no short term redemption fee
3. Lower expense ratio on the average
Cons
1. commisions
2. Executing purchases of ETF can be tricky with the ask and bid spread fluctuating continuously
3. No tax free muni ETF's

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Post by PiperWarrior » Sun Nov 02, 2008 5:39 pm

prinx wrote:With regard to the ETF vs open index funds. It seems to me from what I gathered form the forums. ETFS
pros
1.more tax efficient ( very important to me)
2.no short term redemption fee
3. Lower expense ratio on the average
Cons
1. commisions
2. Executing purchases of ETF can be tricky with the ask and bid spread fluctuating continuously
3. No tax free muni ETF's
I think that's about right.

There seem to be a few muni ETFs, including but not limited to:

SPDR Lehman Municipal Bond (TFI) (0.20%)
iShares S&P National Municipal Bond (MUB) (0.25%)
SPDR Lehman California Municipal Bond (CXA) (0.20%)

but they don't seem to be very liquid (or cheaper than Vanguard funds). You might be better off combining low-cost muni mutual funds for fixed income and ETFs for equity.

I've seen some people mention portability among brokerages as an advantage. For example, if you have mutual funds from E*Trade at E*Trade, you might have trouble moving them to other brokerages.

ETFs are tax efficient capital gain wise, but they cannot magically convert non-qualified dividends to qualified dividends or reduce the yield. Vanguard mutual funds with the ETF share class are somewhat oddballs. Most of them are pretty tax efficient capital gain wise.

If you have a fairly large portfolio, you might qualify for Admiral Shares at Vanguard or Advantage Class at Fidelity in certain funds, so that adds complexity to the ETF v.s. mutual fund issues.

You can construct a portfolio with ETFs, but I hope you won't make using ETFs a goal. They are just building blocks. If you wanted to, you can mix-n-match ETFs and mutual funds (although if you mix them in the same account, you may have settlement issues at some brokerages). If you want to buy something from an electronics store, you probably care about what's inside the box, not the kind of packages like blister packages, paper boxes, cardboard boxes, etc. As livesoft suggested above, I would do an asset allocation first before fund selection although you may sometimes have to do backwards due to poor selection in a 401(k) plan, highly appreciated taxable funds, etc.

To see if ETFs make sense in your case, you might want to play with Calculate and compare costs for Vanguard ETFs and mutual funds. You might be interested in reading To ETF or Not to ETF.

By the way, please don't get me wrong and think that I am pushing mix-n-matching mutual funds and ETFs. It's just that I don't think using ETFs should be a goal. That's all.

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prinx
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Post by prinx » Sun Nov 02, 2008 6:28 pm

Thanks PiperWarrior
toETF or Not to ETF is a very valuable thread. Most people never think of the spread when they put in the order.

I am new to ETF investing . I have not started yet.It all came about when I realized so many mutual fund unrealized loss in October. I have years of gains in this taxable account and suddenly they melted. I want to stay in the market immediately after harvesting the losses so I have about 15 funds to sell which will produce several hundred K.
I will probably place the proceeds in ETF's
total market 60%
Small value 5%
Small growth 5%
world ex us 25%
Small cap inter 5%
I do have Bonds , Cash in other accounts to make up an allocation of bonds and cash as part of an AA plan.

Do you or anyone else have any comments on the above?

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Post by livesoft » Sun Nov 02, 2008 6:33 pm

prinx wrote:Do you or anyone else have any comments on the above?
Your equity asset allocation of 70% domestic, 30% foreign with a very small tilt to small cap is well within the normal ranges of AA seen on this forum and elsewhere. I'd ditch small growth and use small blend or small value in its place.

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Post by PiperWarrior » Sun Nov 02, 2008 6:51 pm

prinx wrote:total market 60%
Small value 5%
Small growth 5%
world ex us 25%
Small cap inter 5%
It looks good, but here are couple of things.

Historically (over the last 80 years or so), small-cap growth has had the slowest growth among the four corners (large-cap value, large-cap growth, small-cap value, small-cap growth). Unless you are an extremely contrarian, I wouldn't overweight small-cap growth.

Again, historically, small-cap stocks and value stocks outperformed the broad market. Small-cap value stocks outperformed the broad market by quite a bit. Although the future is uncertain, there are some logical explanations for this. I would capture the small-cap premium and value premium in one convenient package -- small-cap value. iShares S&P SmallCap 600 Value Index (IJS) (0.25%) seems to be fairly tax efficient (partly (mostly?) due to less exposure to REITs) in terms of CG distributions and QDI. The keyword here is Fama French Three Factor Model, which is discussed in books like All About Asset Allocation by Rick Ferri and The Only Guide to a Winning Investment Strategy You'll Ever Need by Larry Swedroe among others.

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Post by diasurfer » Sun Nov 02, 2008 6:52 pm

I started using ETFs when I opened a WellsFargo PMA account in June, which gives me 100 free trades a year. Over the summer, I thought dealing with the bid/ask spread using limit orders and trying to buy low was fun. Since the market has gotten so volatile, I have found it quite stressful, especially during a tax loss harvest requiring a sell and then a buy.

I plan to continue to use ETFs where I feel I "must", such as in my taxable account and to buy international small funds in my IRA, and to otherwise use mutual funds.

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Post by Speedy » Sun Nov 02, 2008 7:06 pm

Do you or anyone else have any comments on the above?
I use primarilly ETFs in my portfolio, but I'm having very serious second thoughts considering the complexity in trading ETFs "right". It is simple to do market orders, but it can also cost you a lot of money due to bid/ask spread and the difference between the ETF market price and the IIV price (intraday indicated value) and other anomalies.

As far as tax advantages, the Vanguard funds that have ETF counterparts provide essentially the same tax advantages.

Most of the Vanguard US stock index funds have no short term redemption fees, so that advantage goes away. On the International side, it varies, but a 2% redemption fee for holdings less than 60 days is common. Also, check for purchase fees in the international stock funds.

If you read some of the recent posts on this forum, you will see that trading ETFs has been a hot topic of late. Gaps of several percent between market price and IIV has been fairly common, especially in time of market volatility. Even day end market price can vary substantially from the NAV. Just go to the Vanguard website and look at some of the ETFs you are interested in. It is on the overview page for each ETF. You can also see the ticker for IIV there. Yahoo Finance will graph IIV vs. ETF market price over the previous five days, so you can get an idea there how some of these ETFs track their IIV.

There are additional issues trading between open end funds and ETFs because the settlement period is different.

There are probably other issues I haven't touched on.

I guess my main point is: If you go with ETFs, be very very careful doing trades. Being careful takes a lot of time and effort. Don't underestimate it.

Another point regarding TLH, whether using ETFs or open end fund. If you buy a fund within 61 days of (prior to) the dividend date, your qualified dividends become unqualified and will quite possibly up your tax bill.

Regards,
Bill

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Post by livesoft » Sun Nov 02, 2008 7:24 pm

Speedy wrote:...
Another point regarding TLH, whether using ETFs or open end fund. If you buy a fund within 61 days of (prior to) the dividend date, your qualified dividends become unqualified and will quite possibly up your tax bill.

Regards,
Bill
Let's be more clear on this. Here is the IRS text from Pub 550:
Holding period. You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock will not receive the next dividend payment. When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. See the examples, later.
So you can buy a fund within 61 days of the dividend date and still have it a qualified dividend as long as you meet the holding period requirement.

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Post by Speedy » Sun Nov 02, 2008 7:59 pm

Let's be more clear on this. Here is the IRS text from Pub 550:
Quote:
Holding period. You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock will not receive the next dividend payment. When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. See the examples, later.


So you can buy a fund within 61 days of the dividend date and still have it a qualified dividend as long as you meet the holding period requirement.
Livesoft: Thanks for the clarification. It's an important one.

Reagards,
Bill

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