Larry-ish Portfolio, But Easier To Implement. Thoughts?

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venkman
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Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by venkman »

[NOTE: Someone has almost certainly thought of this before and posted about it, and I just missed it when I searched through the topic. Sorry in advance.]

Ever since I learned about the Larry Portfolio, I've been intrigued by it. But without access to DFA funds, it's really difficult to implement the "official" version. So, just for fun, I decided to try a back test of this allocation:

25% US Large Value
25% US Small Value
25% LT Treasuries
25% ST Treasuries

I went with those, because the backtesting spreadsheet has data for all of them going back at least to 1927, and because they're very easy and cheap to invest in. [I can make no claims to the accuracy of the underlying data used in the spreadsheet, but I have no reason to suspect any shenanigans.]

Overall results for time period 1927-2016
(P1 is above portfolio, P2 is 80% TSM / 20% TBM, P3 is 60% TSM / 40% TBM).

P1: CAGR: 8.81% ; Stdev: 11.86% ; Sharpe ratio: 0.49
P2: CAGR: 9.24% ; Stdev: 16.27% ; Sharpe ratio: 0.42
P3: CAGR: 8.44% ; Stdev: 12.41% ; Sharpe ratio: 0.44

If you replace the LV and SV in P1 with 50% TSM, you get:
CAGR: 7.89% ; Stdev: 10.52% ; Sharpe ratio: 0.45

[All returns are nominal. Inflation over the entire period averaged 2.88%, though it did vary widely.]

I also broke it down by decades, comparing it to TSM/TBM ratios of 100/0, 80/20, 60/40, and 40/60. I won't post all the raw data here, but here are some observations:

-P1 won outright in CAGR in 4 of the 8 full decades. As you would expect, those were generally the decades when the market had below-average performance.

-P1 had the highest Sharpe ratio in 6 of the 8 full decades. It only lost in 1941-50 and 1951-60, when the market had significantly above-average returns (13.07% and 15.9%, respectively).

-The worst decade for P1 in terms of underperformance was 1951-1960, when it was beaten by TSM by 6.56% (15.9% vs. 9.34%). However, P1 had a Stdev for the decade of 10.71%, vs. 20.19% for TSM.

Other observations:

-Changing the bond allocation to all Intermediate Treasuries or all TBM has very little effect on the overall results (thought I didn't test it decade by decade).

-The CAGR's for P1 by decade, starting with 1931-1940 and going in order, were: 5.51%, 9.82%, 9.34%, 7.31%, 9.06%, 13.04%, 13.11%, 6.07%, and 8.56%(2011-2016). (The 9.06% number from the 1970's is a bit misleading, because that amount was barely enough to keep up with inflation. But P1's CAGR was still the highest performer in that decade by 0.12%.) Those aren't bad numbers at all. If they knew going in that their average rate of return for the next 10 years was going to be one of those numbers, most investors would be okay with it.

-According to Portfolio Visualizer (data for LT Treasuries only starts in 1978, so this is as of that year), the worst 3-year trailing returns for P1 came in 2009 and 2008 (0.56% and 1.13%, respectively.) The worst 5-year trailing returns also came in 2009 and 2008 (3.66% and 4.02%). The worst year (no surprise) was 2008, where P1 was down 9.71%. The entire drawdown (Nov 2007 - Feb 2009) saw P1 decline by 24.27%, and it had recovered by March 2010 (2 years, 5 months from previous high in Nov 2007). In comparison, a 60/40 portfolio declined by 27.98% and took one more month to recover. An 80/20 portfolio lost 39.92% and didn't recover until Jan 2011. Since 1978, every other drawdown for P1 has taken a maximum of 13 months to recover from, and in all but one, the decline has been under 10% (-14.81% in 1987, recovered in 13 months).

Over the long term, this allocation has delivered returns that are about equal to a typical 70/30 weighted stock portfolio; but it did so with a lot less risk. It seems too good to be true, which means it most likely is...except I still haven't figured out how. I can't find a way to break this thing (in a way that wouldn't also break every other portfolio.)

Possible issues:

-The US has an extended slump while the rest of the world enjoys record returns. Fair point. I meant to say earlier that there is indeed a large amount of single-country risk in this particular portfolio. I would not be opposed to tweaking it by adding some intl. small-cap, or EM. I left those out initially because the 'correct' international asset classes (SCV, EMV, etc.) are harder to find a vehicle for.

-Unexpected rise in interest rates/inflation. Hedged by the short-term bonds. It may take a year or two to fully catch up, so you could make a case for short-term TIPS instead.

-In a sharp market downturn, the treasuries should negatively correlate to stocks exactly when you want them to. Even if they don't, your equity allocation is smaller than it would've been with a conventional strategy.

-Tracking error regret. Very possible, but more of an issue about who should or shouldn't use the strategy.

-If the small and value premiums turn out to be a hoax perpetrated by the Chinese...well, yes, that would be bad, but not necessarily fatal. Unless the small and value premiums actually go negative, you would be left essentially with a regular 50/50 portfolio that had some tracking error against the S&P 500. In back testing, replacing the stock portion of the portfolio with regular TSM lowered the overall CAGR by about 1% (also lowering the Stdev by 1.3%). A 1% drop in CAGR is significant, but the type of people most likely to use this strategy would probably also find corresponding benefits in the lowered risk.

-Isn't this just data mining/Past performance is no guarantee of the future. Possibly. A lot depends on how much you believe in the idea behind the Larry Portfolio in the first place. This is just a 'lite' version of the LP that's more accessible. If the small/value premiums are indeed a real thing, then I think the theory behind the LP is sound. As far as data mining goes, I will say this allocation is the first one I tried. I haven't gone in and tried to tweak things based on the back testing. I tried this first, was impressed by the results (to the point of near-skepticism), and now I'm trying to get feedback. I keep thinking I must've missed some obvious reason why this won't work. If I have, someone please point it out to me. :happy
AlohaJoe
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by AlohaJoe »

venkman wrote: Ever since I learned about the Larry Portfolio, I've been intrigued by it. But without access to DFA funds, it's really difficult to implement the "official" version. So, just for fun, I decided to try a back test of this allocation:

25% US Large Value
25% US Small Value
25% LT Treasuries
25% ST Treasuries
That doesn't look like the Larry Portfolio I'm familiar with:

15% US Small Cap Value
15% International (including EM) Small Cap Value
70% Intermediate Term Treasuries

Implementing the Larry Portfolio with non-DFA funds is pretty straightforward. The only slight hiccup is around international + EM small cap value. But nowadays you can fill that with iShares Edge MSCI Multifactor Intl Small-Cap ETF.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by Call_Me_Op »

venkman wrote:[NOTE: Someone has almost certainly thought of this before and posted about it, and I just missed it when I searched through the topic. Sorry in advance.]

Ever since I learned about the Larry Portfolio, I've been intrigued by it. But without access to DFA funds, it's really difficult to implement the "official" version. So, just for fun, I decided to try a back test of this allocation:

25% US Large Value
25% US Small Value
25% LT Treasuries
25% ST Treasuries
This is not in any way a "Larry Portfolio." I wouldn't even call it "Larry-ish."
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
larryswedroe
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by larryswedroe »

This isn't even close to being a Larry Portfolio for the main reason it isn't diversified!!!! It is US only, an investing "sin" IMO.

I would add also that there is no reason to own both Treasury funds when owning single intermediate would serve the same role---though CDs would be better option if that is available (not in 401k plans).

And finally, personally I would own only SV as there is a much smaller value premium in large stocks which means have to own much more equity to get same expected return and that means more tail risk and more concentration in market beta.

For all equity portfolio and those with access to DFA you only need a very simple two fund portfolio, DFSVX and DWUSX. Doesn't get any simpler, so that excuse is out the door. Then add bonds as appropriate.

Larry
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billyv
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by billyv »

This isn't even close to being a Larry Portfolio for the main reason it isn't diversified!!!! It is US only, an investing "sin" IMO.

I would add also that there is no reason to own both Treasury funds when owning single intermediate would serve the same role---though CDs would be better option if that is available (not in 401k plans).

And finally, personally I would own only SV as there is a much smaller value premium in large stocks which means have to own much more equity to get same expected return and that means more tail risk and more concentration in market beta.

For all equity portfolio and those with access to DFA you only need a very simple two fund portfolio, DFSVX and DWUSX. Doesn't get any simpler, so that excuse is out the door. Then add bonds as appropriate.

Larry
Cue the sound of a microphone dropping... 8-)
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venkman
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by venkman »

larryswedroe wrote:This isn't even close to being a Larry Portfolio for the main reason it isn't diversified!!!! It is US only, an investing "sin" IMO.

I would add also that there is no reason to own both Treasury funds when owning single intermediate would serve the same role---though CDs would be better option if that is available (not in 401k plans).

And finally, personally I would own only SV as there is a much smaller value premium in large stocks which means have to own much more equity to get same expected return and that means more tail risk and more concentration in market beta.

For all equity portfolio and those with access to DFA you only need a very simple two fund portfolio, DFSVX and DWUSX. Doesn't get any simpler, so that excuse is out the door. Then add bonds as appropriate.

Larry
Thanks for the response. I agree the portfolio I put together needs more diversification; it was mostly an experiment to test the lower-allocation-to-higher-volatility idea. Do you have any fund recommendations for making an LP without DFA?

And assuming the LP will provide the equivalent expected return of a typical 70/30 (or whatever it works out to) portfolio, is there any reason for someone with a typical 70/30 portfolio NOT to switch to an LP? (assuming they won't have an issue with tracking error regret). Are there any underlying vulnerabilities to the LP that aren't in a typical 70/30 portfolio? It just seems like a free lunch, so I have a reflexive instinct to distrust it. :happy

Thanks again.
-john
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by Theoretical »

It's really easy to do, and in a tax-efficient way if needed.

US - IJS is still one of the best options, with a high value loading, neutral momentum, and great size characteristics. .25% Expense ratio.

Other good options are Vanguard Small Cap Value (VBR - .08) and Schwab Fundamental US Small (.25)

International Small Caps -
Taxable - Schwab Fundamental International Small Cap (FNDC - .39) or Powershares RAFI Dev-Ex US Small-Mid (PDN - .49)
Tax-deferred - Either of the above or one with WisdomTree International Small Cap Dividend (DLS - .58)

Emerging Markets:

No tilt EM - iShares Emerging Core IEMG .14 or Vanguard Emerging Markets VWO .14.
EM Value - Schwab Fundamental Emerging (FNDE - .4) or Powershares RAFI Emerging Large Company (PXH - .49)
EM Small - iShares Emerging Markets Small (EEMS - .71 - best for taxable and it has a boatload of securities lending revenue that makes the "real ER closer to .15) or WisdomTree Emerging Markets Small Cap Dividend (DGS - .64)

Treasuries are free to trade at Fidelity, and Brokered CD's are dirt cheap there too. Alternately, use an appropriate combination of Treasury bond funds or ETFs.

If I was going to do a Larry Portfolio, I'd break it down like this:

15% - IJS
11% - PDN
4% - FNDE

The ER for that portfolio is 0.127% with free treasuries. The securities lending income on those gets you down below .10%.
Last edited by Theoretical on Tue Apr 04, 2017 2:42 pm, edited 1 time in total.
ZenInvestor
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by ZenInvestor »

My portfolio is:

20% US total Market (401k Russell 3000 fund)
20% US Small Value (DFSVX in my 401k)
20% Intl Developed (NTGI EAFE Index Fund)
20% Intl Small Value & Emerging Markets (DLS, DFEVX)
20% Total Bond

if I were to construct this with all available ETF's i would go:

VTI
IJS
VEA
DLS / VWO
BND

Check out your factor loads here: https://www.portfoliovisualizer.com/

DFA does the best job getting small and value'y, but you can tilt with these ETF's to an extent.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by larryswedroe »

John
You have the response to your question. Not hard to do and more and cheaper and better products coming out all the time.
Larry
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by ZenInvestor »

John - ill add a reminder that you MUST add in more bonds to your portfolio than you would otherwise hold. I would be 95% equities if I were a pure beta investor. Since I tilt, I am 80/20. You cannot miss this point.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by Theoretical »

ZenInvestor wrote:John - ill add a reminder that you MUST add in more bonds to your portfolio than you would otherwise hold. I would be 95% equities if I were a pure beta investor. Since I tilt, I am 80/20. You cannot miss this point.
I completely agree with this. A rule of thumb I use is 1.33 times actual equity amount for a 50/50 split of small and large Value and 1.5 times the actual equity for a straight Small Value (or SCV plus EM large value).

Ergo, my risk tolerance with just beta would be 80/20 more or less (never less than 20% bonds personally). But I'm at 60-65% stocks because of the tilts.

I view tilts much like building a car. If you soup up an engine, you need to tighten up the suspension, get better tires, and upgrade the brakes. If you just boost the engine, you get a speed demon that runs out of control or spins out.
Last edited by Theoretical on Tue Apr 04, 2017 3:47 pm, edited 1 time in total.
Topic Author
venkman
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by venkman »

Excellent. Thanks everyone for replying.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by betablocker »

You can also just take the higher return if you can handle that risk level and increased volatility but you wouldn't be looking at the LP if you were comfortable with that. The biggest downsides of LP like portfolios is the tracking error and the chance that value in particular but also other factors will fade while market beta remained. If value is behavioral then either arbitrage limits would be overcome or people would have to change the way they act in the market. Unlikely in my mind. If value is risked based then the risk would have to go away. At least I think that's right but there are more informed people than I.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by jdb »

Value shmalue. I think Larry is great on bonds, have read his books and follow his bond advice. But as to equities, my mantra is large cap growth and so far past 5 years it has paid off. So in my amateur opinion Larry equity portfolio emphasizing wrong side of equities. But he is undoubtedly correct in long run, but as Keynes said guess where we all are in long run? Good luck.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by larryswedroe »

jdb
If you look at the historical data SV beats LV over any time frame you like, with high persistence, be it one-year, 3, 5, 10 or 20. And the longer the horizon the higher the persistence. It's just that it isn't always the case, just like with market beta vs. tbills
Larry
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by willthrill81 »

jdb wrote:Value shmalue. I think Larry is great on bonds, have read his books and follow his bond advice. But as to equities, my mantra is large cap growth and so far past 5 years it has paid off. So in my amateur opinion Larry equity portfolio emphasizing wrong side of equities. But he is undoubtedly correct in long run, but as Keynes said guess where we all are in long run? Good luck.
Ignore consistent and long-term historical trends at your own peril.

$10k invested in 1972 in small cap growth would now be worth $670,161. If it was invested in small cap value instead, it would be worth $4,456,142. How's that for a comparison? :mrgreen:
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by venkman »

jdb wrote:Value shmalue. I think Larry is great on bonds, have read his books and follow his bond advice. But as to equities, my mantra is large cap growth and so far past 5 years it has paid off. So in my amateur opinion Larry equity portfolio emphasizing wrong side of equities. But he is undoubtedly correct in long run, but as Keynes said guess where we all are in long run? Good luck.
According to PV back test from Jan 2012 - Feb 2017:

US Large Growth: 15.15% CAGR
US Large Value: 15.24% CAGR
US Small Value: 16.25% CAGR

I'm just saying.... :happy
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by fundseeker »

larryswedroe wrote:...For all equity portfolio and those with access to DFA you only need a very simple two fund portfolio, DFSVX and DWUSX. Doesn't get any simpler, so that excuse is out the door. Then add bonds as appropriate.

Larry
Larry, I really appreciate your input on this forum and your commitment to your position on small value. And, I have read several of your books, but sorry, I checked them out at the library instead of buying them. :happy

As for the two funds you mentioned, for those of us who do not have access to DFA, are there any funds (preferably no load) that are very similar to DFSVX and DWUSX that do not require working with a broker? Thanks!
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by AlohaJoe »

fundseeker wrote:As for the two funds you mentioned, for those of us who do not have access to DFA, are there any funds (preferably no load) that are very similar to DFSVX and DWUSX that do not require working with a broker? Thanks!
He already answered exactly this question in the thread already. If you scroll up you'll find your answer.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by fundseeker »

Okay...here are his three responses in this thread. So where is his answer?
larryswedroe wrote:This isn't even close to being a Larry Portfolio for the main reason it isn't diversified!!!! It is US only, an investing "sin" IMO.

I would add also that there is no reason to own both Treasury funds when owning single intermediate would serve the same role---though CDs would be better option if that is available (not in 401k plans).

And finally, personally I would own only SV as there is a much smaller value premium in large stocks which means have to own much more equity to get same expected return and that means more tail risk and more concentration in market beta.

For all equity portfolio and those with access to DFA you only need a very simple two fund portfolio, DFSVX and DWUSX. Doesn't get any simpler, so that excuse is out the door. Then add bonds as appropriate.

Larry
larryswedroe wrote:John
You have the response to your question. Not hard to do and more and cheaper and better products coming out all the time.
Larry
larryswedroe wrote:jdb
If you look at the historical data SV beats LV over any time frame you like, with high persistence, be it one-year, 3, 5, 10 or 20. And the longer the horizon the higher the persistence. It's just that it isn't always the case, just like with market beta vs. tbills
Larry
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by AlohaJoe »

fundseeker wrote:Okay...here are his three responses in this thread. So where is his answer?
John asked exactly the same thing:
Do you have any fund recommendations for making an LP without DFA?
Theoretical wrote a very detailed reply to John that concluded
If I was going to do a Larry Portfolio, I'd break it down like this:

15% - IJS
11% - PDN
4% - FNDE
Larry then said
John
You have the response to your question
i.e. read what Theoretical wrote
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by fundseeker »

I appreciate your help and maybe Larry does as well, but I am pretty sure the answer to my specific question is in this thread, so if Larry has the time, maybe he will answer my question.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by larryswedroe »

fundseeker
As was already pointed out read Theoretical's post (7th in the chain) and you can also use the appendix in my new book which provides various funds to use, that we at BAM have approved to gain exposure to factors.
Larry
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by vv19 »

Theoretical wrote:It's really easy to do, and in a tax-efficient way if needed.

US - IJS is still one of the best options, with a high value loading, neutral momentum, and great size characteristics. .25% Expense ratio.

Other good options are Vanguard Small Cap Value (VBR - .08) and Schwab Fundamental US Small (.25)

International Small Caps -
Taxable - Schwab Fundamental International Small Cap (FNDC - .39) or Powershares RAFI Dev-Ex US Small-Mid (PDN - .49)
Tax-deferred - Either of the above or one with WisdomTree International Small Cap Dividend (DLS - .58)


Emerging Markets:

No tilt EM - iShares Emerging Core IEMG .14 or Vanguard Emerging Markets VWO .14.
EM Value - Schwab Fundamental Emerging (FNDE - .4) or Powershares RAFI Emerging Large Company (PXH - .49)
EM Small - iShares Emerging Markets Small (EEMS - .71 - best for taxable and it has a boatload of securities lending revenue that makes the "real ER closer to .15) or WisdomTree Emerging Markets Small Cap Dividend (DGS - .64)

Treasuries are free to trade at Fidelity, and Brokered CD's are dirt cheap there too. Alternately, use an appropriate combination of Treasury bond funds or ETFs.

If I was going to do a Larry Portfolio, I'd break it down like this:

15% - IJS
11% - PDN
4% - FNDE

The ER for that portfolio is 0.127% with free treasuries. The securities lending income on those gets you down below .10%.
Any particular reason you did not recommend VSS for Int SC?
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by finite_difference »

So using Vanguard funds, a 60/40 "VanLarry" portfolio would be?

30% Vanguard Small Cap Value Admiral (VSIAX) 0.08%
22% Vanguard Small Cap Intl (VFSVX) 0.27%
8% Vanguard Emerging Markets Admiral (VEMAX) 0.14%
40% Vanguard Total Bond Admiral (VBTLX) 0.06%

If you want, can substitute the total bond for a split of long/short treasuries.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by triceratop »

jay22 wrote:
Theoretical wrote:It's really easy to do, and in a tax-efficient way if needed.

US - IJS is still one of the best options, with a high value loading, neutral momentum, and great size characteristics. .25% Expense ratio.

Other good options are Vanguard Small Cap Value (VBR - .08) and Schwab Fundamental US Small (.25)

International Small Caps -
Taxable - Schwab Fundamental International Small Cap (FNDC - .39) or Powershares RAFI Dev-Ex US Small-Mid (PDN - .49)
Tax-deferred - Either of the above or one with WisdomTree International Small Cap Dividend (DLS - .58)


Emerging Markets:

No tilt EM - iShares Emerging Core IEMG .14 or Vanguard Emerging Markets VWO .14.
EM Value - Schwab Fundamental Emerging (FNDE - .4) or Powershares RAFI Emerging Large Company (PXH - .49)
EM Small - iShares Emerging Markets Small (EEMS - .71 - best for taxable and it has a boatload of securities lending revenue that makes the "real ER closer to .15) or WisdomTree Emerging Markets Small Cap Dividend (DGS - .64)

Treasuries are free to trade at Fidelity, and Brokered CD's are dirt cheap there too. Alternately, use an appropriate combination of Treasury bond funds or ETFs.

If I was going to do a Larry Portfolio, I'd break it down like this:

15% - IJS
11% - PDN
4% - FNDE

The ER for that portfolio is 0.127% with free treasuries. The securities lending income on those gets you down below .10%.
Any particular reason you did not recommend VSS for Int SC?
VSS doesn't even try to have value exposure.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by finite_difference »

triceratop wrote:
jay22 wrote:
Theoretical wrote:It's really easy to do, and in a tax-efficient way if needed.

US - IJS is still one of the best options, with a high value loading, neutral momentum, and great size characteristics. .25% Expense ratio.

Other good options are Vanguard Small Cap Value (VBR - .08) and Schwab Fundamental US Small (.25)

International Small Caps -
Taxable - Schwab Fundamental International Small Cap (FNDC - .39) or Powershares RAFI Dev-Ex US Small-Mid (PDN - .49)
Tax-deferred - Either of the above or one with WisdomTree International Small Cap Dividend (DLS - .58)


Emerging Markets:

No tilt EM - iShares Emerging Core IEMG .14 or Vanguard Emerging Markets VWO .14.
EM Value - Schwab Fundamental Emerging (FNDE - .4) or Powershares RAFI Emerging Large Company (PXH - .49)
EM Small - iShares Emerging Markets Small (EEMS - .71 - best for taxable and it has a boatload of securities lending revenue that makes the "real ER closer to .15) or WisdomTree Emerging Markets Small Cap Dividend (DGS - .64)

Treasuries are free to trade at Fidelity, and Brokered CD's are dirt cheap there too. Alternately, use an appropriate combination of Treasury bond funds or ETFs.

If I was going to do a Larry Portfolio, I'd break it down like this:

15% - IJS
11% - PDN
4% - FNDE

The ER for that portfolio is 0.127% with free treasuries. The securities lending income on those gets you down below .10%.
Any particular reason you did not recommend VSS for Int SC?
VSS doesn't even try to have value exposure.
I am not seeing a Vanguard Small Cap Intl *Value* fund. There's Vanguard International Value (VTRIX) but it looks large cap or large cap weighted.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by NiceUnparticularMan »

finite_difference wrote:I am not seeing a Vanguard Small Cap Intl *Value* fund. There's Vanguard International Value (VTRIX) but it looks large cap or large cap weighted.
Raising the issue of whether you compromise and just use VSS, or compromise using a combination of VSS and VTRIX, or possibly compromise by using a combination of VSS and something like EFV (ER 0.40%).
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by finite_difference »

NiceUnparticularMan wrote:
finite_difference wrote:I am not seeing a Vanguard Small Cap Intl *Value* fund. There's Vanguard International Value (VTRIX) but it looks large cap or large cap weighted.
Raising the issue of whether you compromise and just use VSS, or compromise using a combination of VSS and VTRIX, or possibly compromise by using a combination of VSS and something like EFV (ER 0.40%).
Agreed. Reading this thread leads me to believe VSS/VFSVX only is not too bad: viewtopic.php?t=106597

So I am sticking with my current picks for now (limitation being Vanguard only). It's an interesting portfolio, which I may try to use in my Roth IRA.

Here's another thread with discussion including origin of LP: viewtopic.php?t=169285
Last edited by finite_difference on Wed Apr 05, 2017 2:18 pm, edited 1 time in total.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by willthrill81 »

finite_difference wrote:I am not seeing a Vanguard Small Cap Intl *Value* fund. There's Vanguard International Value (VTRIX) but it looks large cap or large cap weighted.
To my knowledge, there are extremely few (possibly zero) international small cap value funds, though you can get int'l small cap and int'l value. Given the choice, I would choose int'l small cap.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by triceratop »

willthrill81 wrote:
finite_difference wrote:I am not seeing a Vanguard Small Cap Intl *Value* fund. There's Vanguard International Value (VTRIX) but it looks large cap or large cap weighted.
To my knowledge, there are extremely few (possibly zero) international small cap value funds, though you can get int'l small cap and int'l value. Given the choice, I would choose int'l small cap.
FNDC?
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by willthrill81 »

triceratop wrote:
willthrill81 wrote:
finite_difference wrote:I am not seeing a Vanguard Small Cap Intl *Value* fund. There's Vanguard International Value (VTRIX) but it looks large cap or large cap weighted.
To my knowledge, there are extremely few (possibly zero) international small cap value funds, though you can get int'l small cap and int'l value. Given the choice, I would choose int'l small cap.
FNDC?
According to M*, it's an international small cap blend fund. It's definitely not 'value'.

http://www.morningstar.com/etfs/arcx/fndc/quote.html
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by Theoretical »

It's the methodology that does it. The Rafi small funds end up tilting to Mid-Growth but squeeze out a hefty amount of value premium. PDN squeezes a loading of .3 positive value (AQR) in a period where international small-mid funds are heavily tilted to growth or even extreme growth. A lot of this comes from holding huge numbers of stocks (>1200 for it and FNDC) at minimal weights, which mutes the growthiness. With the RAFI funds, I'm ok with it because the methodology tends to include relatively cheap growth stocks and a LOT of value, as evidenced by the now-discontinued RAFI pure value funds. Also DLS combines very nicely with either of these, as there's not much overlap in holdings.

There is one Multifactor Quant (quality, momentum, value) ISV fund besides DFA. It's Segall, Bryant, and Hamil International Small Cap Value (SBSIX - 1.03% at Scotttrade or SBHSX for 1.28% and no load/transaction fee at Schwab). It has about 450 stocks, but when running the regression on it alongside PDN and DISVX, the value loading was too low and the turnover is 94%. However, it is well-constructed. I'll keep an eye on it. It used to be called the Philadelphia International Small Cap fund by Glenmwde (but managed by SBH with the same strategy). Its lack of availability and high turnover without good loadings so far negate it for me. On the positive side, though, it's almost an entire quintile below PDN/FNDC

There are a few other deep Value active funds that I've investigated, but all fall short. Also, the first trust ISV fund is abysmal, with a negative alpha approaching -8% and not even giving good loadings. Brandes Capital has one (with VERY negative momentum) and ClearBridge has a decent one (1-1.1% and 44% turnover) with ok loadings.

There is one that intrigues me, but it's ER is stratospheric and it's brand new.

It's the ALPS Global Microcap Value fund. METIX (1.7% ER for the institutional shares and over 2 for the A class at Ameritrade NTF). It has 288 stocks and includes emerging markets and US (only 22% of the portfolio), but the average market cap is under $300 million. It expressly intends to target the micro value premium, but is not a Quant fund and relies on qualitative and company research analysis. The turnover is also 77%. If it were more like 20-30%, I'd seriously consider it, but 288 is way too few companies.

I excluded VSS chiefly because I think it tries too hard to squeeze every last drop out in replicating a huge index in some less than liquid markets. In addition, as noted it doesn't have a value tilt. It's cheap but has some significant negative alpha that SCZ does not while not generating value or other hard-to-extract premiums.

If I was going only Developed Small, I'd pick iShares SCZ at .4% because it's ultra liquid and the astronomical amount of securities lending basically makes the fund have a 0-to-negative ER. For EEMS, it's not very liquid, but it faithfully replicates an index that's devilishly hard to track and the lending revenue basically makes it cost .15% per year.
Last edited by Theoretical on Wed Apr 05, 2017 5:48 pm, edited 1 time in total.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by larryswedroe »

Theoretical
Basically for reasons you highlight I agree with your conclusions. For US when we helped design Bridgeway Small Value Fund we set the parameters so it would own about 600 stocks. And for international would want many more since include EM
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by Theoretical »

This violates the rule of "easier," but you can use 2 funds to get synergy to move closer to DFA loadings if there's not a lot of overlap with the funds. RAFI small funds are particularly well suited to matching up with more focused value funds in their respective classes. Their design helps lower overall turnover for the chimera fund.

IJS and FNDA/PRFZ play very well together and so do PDN and DLS or especially SBSIX (though this half of the pairing should only be in tax-advantaged accounts). On the EM side, FNDE & DGS make great music together that cancels out of some of the sector and country biases of each.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by Theoretical »

The other thing is that it's not the stock funds that bear the bulk of consideration - it's the bonds!

At the end of the day, it's the bonds that keep this engine (and any portfolio!) humming and are the secret sauce, not the holy grail of perfect factor coverage.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by drummerboy »

I've been adjusting my portfolio to be more of a LP (SCV, EMV) with a BIG bonds portion.

But, most of my assets are in Taxable. My IRA balances are relatively small. I can put my TIPS allocation in my IRA, but that still leaves a significant portion in Taxable for bonds.

My plan is to use Limited-Term and Intermediate-Term Muni Funds (high quality Baird).

Or should I just be using Short-Term treasuries given that current yields are fairly low? That seems like a risk given my 33% tax bracket. I really don't want small interest payments from Treasuries to kill me in the tax world.

Theoretical, I have really appreciated your insight so far (and Larry too for the book! :D ).

I recognize Muni Bonds have more risk than treasuries, but I also have access to a SMA setup for Muni Bonds that only selects AA/AAA muni's.

Thoughts?
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by Oliver »

drummerboy wrote:I've been adjusting my portfolio to be more of a LP (SCV, EMV) with a BIG bonds portion.

But, most of my assets are in Taxable. My IRA balances are relatively small. I can put my TIPS allocation in my IRA, but that still leaves a significant portion in Taxable for bonds.

My plan is to use Limited-Term and Intermediate-Term Muni Funds (high quality Baird).

Or should I just be using Short-Term treasuries given that current yields are fairly low? That seems like a risk given my 33% tax bracket. I really don't want small interest payments from Treasuries to kill me in the tax world.

Theoretical, I have really appreciated your insight so far (and Larry too for the book! :D ).

I recognize Muni Bonds have more risk than treasuries, but I also have access to a SMA setup for Muni Bonds that only selects AA/AAA muni's.

Thoughts?
Make sure you run the numbers on CDs versus Muni.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by Theoretical »

Drummerboy, I've got several possible ideas for you beyond the SMA, one slightly offbeat, one a bit exotic, one a bit out of left field, and the last bordering on bathing in nuclear waste in terms of risk if you don't know EXACTLY what you're doing. I speak from experience with the vast majority in taxable of trying to figure out what to do with bonds, though I'm not in your tax bracket.

1. The slightly offbeat. Consider a short TIPS or short term treasury ETF from either Vanguard or iShares in addition to the BMBIX. Why ETF? Because the capital gains from rolling the bonds can often be absorbed in the ETF structure, ETFs have made treasuries a lot more friendly to own in taxable. Why VG or iShares - because they're by far some of the most effective ETF providers at tax efficiency, even for the wonkiest of assets, especially when you dig into the annual reports (this especially for securities lending income).

2. Consider a barbell of BMBIX with longer duration treasuries. Acknowledge the limits of your tax-deferred space and boost the duration significantly using long-treasuries or even STRIPS in the limited IRA space, effectively building a duration barbell. EDV and ZROZ produce truly shocking amounts of term exposure for very little input, but it's not a low-volatility bond holding. If you buy either, it's strictly an portfolio theory type volatile asset that you have to be prepared to treat just like an equity fund in terms of risk. If you've got a bit more space, then regular long treasuries can be your friend if you're kind of stuck at 40-50% bonds or less due to the taxable constraints. BUT, I'd seriously never build a portfolio with this much STRIP exposure that didn't have a serious unexpected inflation fighter like Commodities taken out of the equities. However, I think some principles can be derived from this.

Here's a portfolio comparison if you're "stuck" with a 60/40 allocation: http://bit.ly/2ndybbX. The use of leverage in the last two portfolios (short cash) is for a reason. The first portfolio is an 50/50 BMBIX/Intermediate Treasury allocation with 60% equities. The second is translating a 40/60 Larry Portfolio up to a 60/90 directly parallel portfolio by leveraging bonds while keeping the equity percentages the same. The third can only be explained properly by this:

http://bit.ly/2oFRHh5

In this, I cloned the oldest ultra-long treasury fund I could find, PIMCO's Extended Duration fund (PEDIX). However, it started in 2006, and I wanted some earlier data. So I fiddled around with leveraging the Vanguard Long Treasury and Intermediate until I got to +180 VUSTX, +20 VFITX and -100 Cash to get essentially the same volatility (assume the "better" performance is eaten by the leverage costs). Going back to the third portfolio, 38% Long Treasuries, 2% Intermediate Treasuries and -20% Cash is 200% of the 20% Long Treasury allocation for the purposes of volatility matching the portfolio back to 2001. Keep in mind, all of this data was during a declining rate period. It'd get ugly as sin in a rising rate era.

3. Accept some of the negatives of the Total Bond Index for a tilted portfolio (negative convexity due to call risk and corporate bonds displaying equity features in crises) and put a slug of bonds into a Vanguard Variable Annuity for an ER of .45% https://personal.vanguard.com/us/funds/ ... ntExt=INT. A variable annuity like this is one way to expand your tax-advantaged space, but it comes at the price of later taxable distributions and some insurer risk.

4. Use treasury futures rather than treasury bonds to take advantage of the favorable tax treatment (60% Long term and 40% short term capital gains for all returns) and invest the collateral beyond a margin of safety in either more BMBIX or a shorter duration muni fund. Strictly speaking, you wouldn't be leveraged in the net, but you would have to pay a lot closer attention to your portfolio and have to roll the futures quarterly. There's posts on here and other info about this option, but while the tax treatment has lots of appeal, the stakes and odds of badly screwing it up outweigh touching it while we're in the 25-28% bracket.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by Theoretical »

Oliver wrote:
drummerboy wrote:I've been adjusting my portfolio to be more of a LP (SCV, EMV) with a BIG bonds portion.

But, most of my assets are in Taxable. My IRA balances are relatively small. I can put my TIPS allocation in my IRA, but that still leaves a significant portion in Taxable for bonds.

My plan is to use Limited-Term and Intermediate-Term Muni Funds (high quality Baird).

Or should I just be using Short-Term treasuries given that current yields are fairly low? That seems like a risk given my 33% tax bracket. I really don't want small interest payments from Treasuries to kill me in the tax world.

Theoretical, I have really appreciated your insight so far (and Larry too for the book! :D ).

I recognize Muni Bonds have more risk than treasuries, but I also have access to a SMA setup for Muni Bonds that only selects AA/AAA muni's.

Thoughts?
Make sure you run the numbers on CDs versus Muni.
At his 33% tax rate, CDs are really not worth considering, especially not if there's any chance he could end up in an income tax state for work or family.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by drummerboy »

Theoretical wrote:Drummerboy, I've got several possible ideas for you beyond the SMA, one slightly offbeat, one a bit exotic, one a bit out of left field, and the last bordering on bathing in nuclear waste in terms of risk if you don't know EXACTLY what you're doing. I speak from experience with the vast majority in taxable of trying to figure out what to do with bonds, though I'm not in your tax bracket.
So much for the "easier to implement!" :happy

Right now (due to legacy investments with large cap gains), here is the "interim" 45/55 Larry Portfolio implementation (I recognize that true LP is 30/70).

15% SmallCap Value (IJS or VBR)
15% EmergingValue (FNDE)
5% Intl-LargeCapValue (FNDC)
10% Total Stock Market (SCHB)

15% TIPS (in 401k, most likely as FSIYX, Fidelity is brokerage, can't change this in the short term). This could also be CDs potentially.

20% Muni Bond - Long-Term SMA (.35% Annual Fee)
15% Muni Bond - Intermediate (either BMBIX or VWITX)
5% Muni Bond - Limited Duration (VMLTX)

That is 40% in Municipals. That is my concern. I'm currently in a 33% Fed Tax Bracket and residing in a 6% Income Tax State.

I'm looking for something for the bond portion that provides the safety that Larry describes in his book, but doesn't kill me in taxes. My plan isn't fully implemented, I'm in transition, so I can still make some reasonable adjustments at this time. My Tax Advantaged portion is only ~15% of my portfolio, even at maximum contributions this imbalance won't be solved any time soon.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by larryswedroe »

theoretical
RE CDs and 33% rate. On the long end of the curve that is usually true, but not always so on the shorter end. Over the last five years with the very steep curve at the short end for munis we even bought CDs out to as far as 5 years for even higher bracket investors. You simply have to do that math. In our case for every client we have their tax rate in our system and when we go to buy something it shows all the available instruments we can buy over the curve and which is the highest AT return.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by Theoretical »

drummerboy wrote:
Theoretical wrote:Drummerboy, I've got several possible ideas for you beyond the SMA, one slightly offbeat, one a bit exotic, one a bit out of left field, and the last bordering on bathing in nuclear waste in terms of risk if you don't know EXACTLY what you're doing. I speak from experience with the vast majority in taxable of trying to figure out what to do with bonds, though I'm not in your tax bracket.
So much for the "easier to implement!" :happy

Right now (due to legacy investments with large cap gains), here is the "interim" 45/55 Larry Portfolio implementation (I recognize that true LP is 30/70).

15% SmallCap Value (IJS or VBR)
15% EmergingValue (FNDE)
5% Intl-LargeCapValue (FNDC)

10% Total Stock Market (SCHB)

15% TIPS (in 401k, most likely as FSIYX, Fidelity is brokerage, can't change this in the short term). This could also be CDs potentially.

20% Muni Bond - Long-Term SMA (.35% Annual Fee)
15% Muni Bond - Intermediate (either BMBIX or VWITX)
5% Muni Bond - Limited Duration (VMLTX)

That is 40% in Municipals. That is my concern. I'm currently in a 33% Fed Tax Bracket and residing in a 6% Income Tax State.

I'm looking for something for the bond portion that provides the safety that Larry describes in his book, but doesn't kill me in taxes. My plan isn't fully implemented, I'm in transition, so I can still make some reasonable adjustments at this time. My Tax Advantaged portion is only ~15% of my portfolio, even at maximum contributions this imbalance won't be solved any time soon.
Did you get ISV and EM Value flipped? I would not want to have more than 1/3 of my International allocation in EM.

As to bonds, Larry's books and articles often reference 40/60 LP vs 60/40 TSM/BND, and 45/55 is not that far off, especially since you've got a broad market large cap holding.

Can the SMA also buy you short term munis? If so, they can buy pre-refunded bonds BMBIX either doesn't own or owns only a small stake. Because these are generally backed by treasuries in a separate escrow account, they've got a nice mix of treasury and muni features and require far less diversification.

I think if you replaced half of the TIPS allocation with long treasuries (FLBAX) and replaced the short munis with short term TIPS or short TIPS and I Bonds. If you can buy a crazy ETF like ZROZ or EDV in the 401k, then you're even more set because you won't need much to get the effective duration of a 30/70 or at least a 35/65.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by Theoretical »

Larry, in a rising rate environment with greater inflation, which fund is going to be less tax efficient - a short 0-5 TIPS etf like VTIP or a short term treasury ETF like SHY? The former has the inflation adjustment yield to the principal but a rock bottom coupon rate, while the latter has the higher nominal coupon but will suffer a bit under inflation.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by larryswedroe »

theoretical
Likely would not be owning TIPS in taxable accounts, and for shorter end for inflation protection CDs would be choice. And personally would in general prefer longer TIPS as get the same inflation hedge but also get TERM premium
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by TomP10 »

Theoretical wrote: EM Small - iShares Emerging Markets Small (EEMS - .71 - best for taxable and it has a boatload of securities lending revenue that makes the "real ER closer to .15) or WisdomTree Emerging Markets Small Cap Dividend (DGS - .64)

I found your comment about "boatload of securities lending revenue" interesting. Where would I find such information for EEMS and DGS? I am considering those two.

Annual report?
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by TomP10 »

I looked up the EEMS annual report. I did see some discussion of securities lending revenue. However, nothing in the discussion gave me the impression iShares in not charging the full 0.71% expense ratio fee.

Can you clarify?
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by Theoretical »

Yep. See pages 79-80 - Look under the Statement of Operations and the Statement of Assets and Liabilities. https://www.ishares.com/us/library/stre ... -08-31.pdf

EEMS - ER of .71 had 121 million in net assets, $658 thousand in net expenses and almost $578 thousand in lending revenue. End result. $79,525 in expenses after lending covering 121 million in assets. Even more than that, that's NET of Blackrock taking 25-30% of the revenue. Net expense ratio: .0656%.

IEMG - ER of .14 with $16 billion in net assets. $17.2 million in expenses (no fee waiver) and $20 million in net securities lending (again NET of Blackrock's cut). $2.709 million after covering all expenses. Net expense ratio: -.0169%. That is not a typo.

http://quote.morningstar.com/etf-filing ... c77f83803e

DGS - ER of .64% with $1 billion in net assets. Net with the lending is about .52%.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by TomP10 »

Theoretical wrote:Yep. See pages 79-80 - Look under the Statement of Operations and the Statement of Assets and Liabilities. https://www.ishares.com/us/library/stre ... -08-31.pdf

EEMS - ER of .71 had 121 million in net assets, $658 thousand in net expenses and almost $578 thousand in lending revenue. End result. $79,525 in expenses after lending covering 121 million in assets. Even more than that, that's NET of Blackrock taking 25-30% of the revenue. Net expense ratio: .0656%.

IEMG - ER of .14 with $16 billion in net assets. $17.2 million in expenses (no fee waiver) and $20 million in net securities lending (again NET of Blackrock's cut). $2.709 million after covering all expenses. Net expense ratio: -.0169%. That is not a typo.

http://quote.morningstar.com/etf-filing ... c77f83803e

DGS - ER of .64% with $1 billion in net assets. Net with the lending is about .52%.
Thanks for the help.
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Re: Larry-ish Portfolio, But Easier To Implement. Thoughts?

Post by heyyou »

Some of the fixed fee advisors have access to DFA. That path may only be cost effective for retirees who are no longer in 401k plans, but the bond side of the 30/70 allocation would suit a retiree.
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