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Asset Allocation ETFs: Low Expenses Are Nice, Losing Less Money Is Nicer!

12 January 2009 at 11:06 am by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

I'm a big fan of the folks over at Index Universe.  Like myself, Matt Hougan and Jim Wiandt have been at the forefront of the inevitable exchange-traded fund revolution.

Nevertheless, there are times when Mr. Hougan's penchant for simplification can undercut a darn good argument. Let me explain.

Every now and again, the Index Universe principal puts together diversified portfolios that capitalize on low expenses alone. Here is the latest: 

Index Universe: Low Expense Ratio Portfolio
Weight Expense Ratio
Vanguard Total Market (VTI) 40% 0.07
Vanguard Europe Asia Pacific (VEA) 30% 0.12
Vanguard Emerging Markets (VWO) 5% 0.25
Vangurd Total Bond Market (BND) 15% 0.11
Vanguard REITs (VNQ) 5% 0.12
iPath Dow Total Commodities (DJP)  5% 0.75
Blended Expense Ratio 0.1365

Yes, it is noteworthy, and genuinely important, than one can get access to a diversified mix of stocks, bonds, REITs and commodities for less than 0.14% annually. The average ETF investor may pay closer to 0.45% per year, while the average mutual fund investor may pay 1.4% per year.

Indeed, one of the greatest benefits of ETF investing is the cost structure. All things being equal, the lower one's investing costs, the higher one's investment returns.

What's not mentioned here is the ghastly investment returns such a buy-n-hold grouping delivered in 2008 alone. In 2008, this portfolio lost in the neighborhood of -40%. A 40% loss requires a 67% gain to recover. Historically, for this portfolio, that may mean a 5-7 year waiting period.

Granted, ETFs are the right vehicle for accessing stocks, bonds, currencies, commodities and real estate at the lowest cost costs possible. Moreover, lower investing costs are one of the big reasons ETFs are the best way to invest. But ETFs offer so much more!

For starters, ETFs offer one the ability to manage downside risk. Aren't you tired of hearing folks talk about an inability to "time" the market? So you're just supposed to sit around and watch your money disappear? Puhhhhhlllllleeeeeeeeeeease.

ETFs are diversified funds that trade like stocks. And since risk is measured on the downside — risk being defined as the possibility of loss — one must actively protect against excessive losses. This is very easy to do with ETFs and individual stocks… simply by using trailing stop-loss orders.

Inevitably, someone asks, "So when do you get back in?" Who says you have to buy the exact same ETF? Maybe you will purchase something entirely different immediately. Hundreds of ETFs are available to look at and evaluate. Or maybe you will use the same stop-loss percentage off the low that is reached after you have sold.

Look, don't be brainwashed into the notion that you can't sell for tax reasons, or that some magical allocation is appropriate for your age and so-called risk tolerance. ETFs are not merely cost-management tools, they are risk-management tools. Understand risk better and you will manage it better, through dozens of techniques that do not make you an evil market timer.

Even if you insist on buy-n-hold, lazy portfolios, I've got one that you may find less risky. In essence, I'm a big believer in capturing income and dividends, yet another benefit of the astute ETF analyst.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

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One Response to “Asset Allocation ETFs: Low Expenses Are Nice, Losing Less Money Is Nicer!”

  1. Dave W says:

    Amen! to not holding losers. The 40% loss incurred takes over 6 years!! to recover at 10%!!

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