How Costs Figure In
Both of these calculations measure the change in prices of the underlying holdings and do not take into account the additional costs of investing. However, for the SBRQAM Index, I reduced the price returns by 65 basis points per year to represent the imputed cost of the KNOW ETF (this also applies to the next two charts below).
The relative statistics over the last three, five and 10 years, presented in the chart below, show that the SBRQAM Index can enhance the return of a core investment in a market-capitalization-weighted index. The resulting returns are compelling enough to consider an allocation to an ETF tied to SBRQAM, even though SBRQAM has a higher beta than the benchmark index.
I firmly believe investing in a product such as KNOW that follows the SBRQAM Index creates an opportunity to enhance portfolio returns. The chart below shows returns were stronger in the last seven calendar years. This helps draw the conclusion that it may work well with a core market fund and may provide excess returns over time. However, we should not rely on past performance history alone.
So, from this point, my due diligence process digs into the fundamentals of the ETF to make sure it improves the overall fundamentals of the portfolio. In my opinion, if the underlying fundamentals are not better, then the likelihood of enhancing returns is diminished.
For here, I look to widely held ETFs that are often used as a core investment to represent the overall market—the SPDR S&P 500 (SPY | A-98), the Vanguard Total Stock Market (VTI | A-100) and the iShares Core S&P Total U.S. Stock Market (ITOT | A-100). The next chart compares the fundamentals of KNOW to three ETFs as of Dec. 31, 2015: