Sunday, June 17, 2007

Beating the S&P 500

Back in early 2006, The Confused Capitalist suggested a low maintenance model portfolio that I felt would outperform the S&P500 over the next five years or so. The portfolio was based on certain themes, some of which are ones which have generally proven to outperform over longer periods of time, such as buying value positions and small companies.

Additionally, I felt that commodities and emerging markets would continue to benefit from the world situation, and that the US dollar would continue to be under pressure - thereby adding to investments denominated in something other than US$. I suggested positions in a total of six ETFs, at values of 7.5% to 25% of the portfolio, with most around the 20% range.

To compare, we suggested a suitable tracking comparison would be the S&P500, as represented by the "SPY" ETF which was then priced at $131.47. It closed Friday June 15, 2007 at $153.07, a gain of 16.4%, which is pretty good. Add in dividends of roughly 2% or so, and the total gain is about 18.4%. If you'd gotten this, you would have beaten about 80% of the mutual funds out there, using traditional five year horizons as a guide (only 1 in 5 mutual funds beats the index, when the period is five years or so).

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Let's see how our own simple ETF-based portfolio, which looks like this, performed:

  • 20% weighting to a broad-based international ETF - EFV - $64.91 - ishares product tracks the MSCI EAFE Value Index, which tracks European, Australian, and Far Eastern markets. This ETF closed at $78.92 on Friday June 15, 2007, for a 21.6% gain, plus dividends. Advantage: The Confused Capitalist.

  • 20% weighting to small company - IWN - $74.99 - ishares product tracks the Russell 2000 Value Index (US small cap). This ETF closed at $85.11 on Friday June 15, 2007, for a 13.5% gain, plus dividends. Advantage: The S&P500.

  • 25% weighting to emerging markets - EEM - $105.45 - a broadly-based (for emerging markets) ishares product tracks the MSCI Emerging Markets Index. This ETF closed at $132.42 on Friday June 15, 2007, for a 25.6% gain, plus dividends. Advantage: The Confused Capitalist.

  • 20% weighting to the value portion of the S&P 500 - IVE - $70.62 - an ishares product tracking the value portion of the S&P500. This ETF closed at $83.78 on Friday June 15, 2007, for an 18.6% gain, plus dividends. Advantage: The Confused Capitalist.

  • 15% Own Ideas (in this case, my belief that commodity-oriented countries will do well for the next five to ten years). I'd equally weight a Canadian ETF (EWC) - $24.86 - and a Brazilian ETF (EWZ) - $44.25. The EWC closed at $30.58, for a 23.0% gain, while the EWZ closed at $62.66, for a 41.6% gain. Advantage both: The Confused Capitalist.

These weightings result in a total gain of 22.0%, plus dividends which, in this case, would add about another 1.5%, so the total would be about 23.5%, versus the 18.4% all in of the SPY ETF.

So not only did the Confused Capitalist beat the S&P500 ETF by five percentage points in just over a year, it did so in 5 of the 6 ETFs selected, showing broadly-based outperformance. The Confused Capitalist feels comfortable continuing to hold these same positions and original weightings going forward over the next year or so, and will check back in 2008 to compare relative performance.

I hope to continue to show that a low-maintenance portfolio, with modest thought given to what the future might look like, will continue to be able to outperform static indices. Those wishing to view some similar simple portfolios felt to have an excellent change to outperform the S&P500, should go here, here and here.

With these increases in value, the weightings have changed slightly going forward, but not enough to warrant a re-balancing. These weightings are now:
  • EFV - 20.0%
  • IWN - 18.6%
  • EEM - 25.7%
  • IVE - 19.4%
  • EWC - 7.6%
  • EWZ - 8.7%
June 18 2007. 12:10PM Pacific time. Correction made to the EEM discussion bullet, which misstated (understated) the current price and percentage increase. Ah, the dangers of using the "cut and paste" function!


The Confused Capitalist


    Will Rahal said...

    I think that evidence is growing pointing(finally) to a slowdown in US consumption. See
    This slowmdown will definitively affect the US and global markets.
    So, I think that your choice of a portfolio, should keep this slowdown in mind.

    Jay Walker said...

    With value leanings throughout my portfolio (some 60% has a clear value tilt), this is already in mind (remembering that value positions beat growth positions EVEN MORE in bear markets).

    But thanks for dropping by ....

    Jay Walker

    Deborah said...

    I completely agree on your analysis on the interest rates.

    And when I see the comments on growth stocks, I think the visual from the post states my feelings on them, run like you are trying to win a marathon...

    I see you are from BC, like I am, Vancouver.