Don’t Confuse Cheap With Good

July 19, 2010

Matt's ETF portfolio sure is cheap, but is it actually the best?

I get it Matt, ETFs are cheap. But all sorts of things are cheap that don't necessarily deserve praise. McDonald's Happy Meals, Yugos and your barber all come to mind. While I applaud you tracking just how cheap a diversified portfolio one can make with ETFs, consider the other side of the coin—the access to actual good ideas you can get with ETFs.

I know you love big monolithic cap-weighted indexes, but I feel obligated to point out some options here. Let's start with your core equity exposure. There's certainly nothing wrong with your "own every stock on the planet" selection of Schwab's big-three. But consider the brainchildren of "the bearded wonder" Rob Arnott, at least for a minute. His funds, or rather, PowerShares’, closed out last year with every one of them beating their benchmarks since inception, a fact PowerShares was inexplicably quiet about. Picking on just your core examples: since Schwab’s U.S. equity fund hit the street late last year, the PowerShares FTSE RAFI US 1000 (NYSEArca: PRF) is up 9.14 percent against a 7.42 percent return for Schwab’s fund (NYSEArca: SCHB). I'd say that's more than enough to justify the 39 basis points in fees.

And Vanguard's Bond Fund (NYSEArca: BND)? Sure it's cheap, but so are stale Doritos. You of all people should be skeptical of a bond index that blindly stumbles into overweighting the most debt-ridden companies. How about a little more nuanced slicing and dicing using, perhaps, the proven benefits of something like Pimco's Enhanced Short Maturity ETF (NYSEArca: MINT) on the short end and some of the more granular iShares offerings as you move out the yield curve? Sure, MINT charges an outrageous 35 basis points, and a classic like the iShares 20-year bond fund (NYSEArca: TLT) tips the scales at a hefty 15 bps (sarcasm intended), but at least you're getting a more carefully selected slice of the pie.

And commodities? DJCI? Really? Sure, it's cheaper than your old choice, DJP, and it does track the same index, but DJCI has $13 million to its name and trades about 1,500 shares a day. As I'm writing this, on a midday in sleepy July, it hasn't traded a single share today, and the current bid is a DOLLAR wide on a $24.50 net asset value. I put that in the category of effectively un-ownable unless you have the swing to make your own shares with an alternate liquidity provider via the creation/redemption process.

And is that even the "right" commodities index? Compared with most commodities indexes, the Dow Jones-UBS you're suggesting is massively underweight in energy, with "just" 14 percent of the index in crude, and a large position (comparatively) in things like gold and soybeans (both over 10 percent).

Maybe that's the "right" call for a given investor, but the 50 percent underweight in energy versus the more common indexes, like the Goldman Sachs Commodity Index, could create a lot of unexpected performance variations in the name of economy.

Come to think of it, cash is really cheap too.

I get your point Matt. I just worry we sometimes get so fixated on "cheap" around here we forget about "good."

Find your next ETF

Reset All