Hello,
one thing is worrying me with the easy, simple approach involving the use of one ETF for the stocks portion of the PP. What if the ETF seller goes bankrupt with my money ? That's a 25% loss over the entire portfolio, that's a lot to lose for a "fail-safe", low volatility portfolio. What's the solution ? Using a few different ETFs, losing a part of the simplicity of the approach ? (and, actually, having more than 5% of my portfolio in a single asset is worrying me, so that would imply finding at least 5 low-cost ETFs, which is not that easy where I leave) Switching to stock-picking, say, 25 stocks, each representing 1% of the portfolio ? Using both ETFs and actively managed funds (I have seen at least of of you is using this strategy) ? Something else ?
25% in one stocks ETF : is it worth the risk ?
Moderator: Global Moderator
Re: 25% in one stocks ETF : is it worth the risk ?
ETFs/Mutual funds are designed so that the operator does not hold the actual assets. They are held in trust if I recall. So even if a fund manager goes under, the assets are still there. What will likely happen is a poorly performing ETF will be shut down by the operator and funds dispensed back to shareholders. In that case there could be tax impacts. This is why I advise using only very large broadly based index funds being run by established companies. They hold so much in assets and are so liquid that the chances of them being shut down are small.
With that said, some people may choose to use ETFs/Funds from two different providers as extra assurance (e.g. 50% in Vanguard and 50% in iShares). That would be very good diversification against a problem at one provider and still be fairly simple to manage.
With that said, some people may choose to use ETFs/Funds from two different providers as extra assurance (e.g. 50% in Vanguard and 50% in iShares). That would be very good diversification against a problem at one provider and still be fairly simple to manage.
Re: 25% in one stocks ETF : is it worth the risk ?
OK, thanks. And do you think having, say, a Russel 2000 & a SP500 ETF (to profit a little more from volatility) is worth the added rebalancing "work" it implies ? (knowing that rebalancing is free of taxes & broker fees on my contract)
Re: 25% in one stocks ETF : is it worth the risk ?
All depends on you. Every time you add another asset to rebalance back and forth across there is another emotional hurdle that needs to be crossed. Meaning, will you actually do it when it is required or will something prevent you from executing? Also this could lag other portfolios at time if one of the assets is underperforming. Only you know the answer to those questions...k9 wrote: OK, thanks. And do you think having, say, a Russel 2000 & a SP500 ETF (to profit a little more from volatility) is worth the added rebalancing "work" it implies ? (knowing that rebalancing is free of taxes & broker fees on my contract)
Re: 25% in one stocks ETF : is it worth the risk ?
ETFs do lend shares. At least the dozen or so I've dug deep enough into their prospectus to find out how they make their money lend shares.
The only way they don't get them back is if something extraordinarily bad (probably even worse than MF Global) happens. In that case it is likely that any ETF that holds the same shares will also have loaned them out.
What's the alternative?
Only one I know of. Hold the shares yourself. Hold them at least in a cash (non-marginable) account (all IRA accounts that I know of) or for non-IRAs you could hold them DRS (in your own name) or even get paper shares.
Look at that ETF on the managers web site. Look at the holdings. Pick the top 10. Or your favorites from the top 10 or 20 or 30, however many you want to hold. Buy them in the proper proportion. Pick up a small cap ETF with the balance of your stock allocation or even the big fund if you are holding no more than maybe 50% as individual stocks.
OK, that's basically what I do. I chose about a dozen dividend growers, and VBK. Dividend growers might not be the best candidates for 'lend out' protection, because the dividend itself tends to discourage borrowing of those shares. But those are the companies I like, so that's what I hold.
Oh, and a tangential note... Learning about an individual company is easy. Learning about an ETF or mutual fund is just painful! And they change (one or two times a year I get some legal notice of some change for one of the few funds I do own). And then if you have any curiosity you end up research companies anyway...
The only way they don't get them back is if something extraordinarily bad (probably even worse than MF Global) happens. In that case it is likely that any ETF that holds the same shares will also have loaned them out.
What's the alternative?
Only one I know of. Hold the shares yourself. Hold them at least in a cash (non-marginable) account (all IRA accounts that I know of) or for non-IRAs you could hold them DRS (in your own name) or even get paper shares.
Look at that ETF on the managers web site. Look at the holdings. Pick the top 10. Or your favorites from the top 10 or 20 or 30, however many you want to hold. Buy them in the proper proportion. Pick up a small cap ETF with the balance of your stock allocation or even the big fund if you are holding no more than maybe 50% as individual stocks.
OK, that's basically what I do. I chose about a dozen dividend growers, and VBK. Dividend growers might not be the best candidates for 'lend out' protection, because the dividend itself tends to discourage borrowing of those shares. But those are the companies I like, so that's what I hold.
Oh, and a tangential note... Learning about an individual company is easy. Learning about an ETF or mutual fund is just painful! And they change (one or two times a year I get some legal notice of some change for one of the few funds I do own). And then if you have any curiosity you end up research companies anyway...
Re: 25% in one stocks ETF : is it worth the risk ?
Thank you all. Clive, I like your approach. It reminds me of Taleb's advice : keep as much as possible in the safest assets, and a little of very risky, very volatile assets. Well, I don't really like leveraged assets, but using a small caps ETF is quite interesting in this regard.
As for risks in ETF : most of the ETFs in Europe are managed in a "synthetic" way. That means managers of the ETF don't actually hold the stocks you'd think they hold, but rather have a complicated mix of assets (consisting in a few stocks, but also bonds, cash and a lot of options) that ultimately achieves the same performance as the index. They do so for a few reasons : it's easier to track precisely complicated indexes whose composition tends to evolve frequently, it reduces fees and, for fiscal reasons, they are sometimes preferred by the customers : French tax system encourages you to hold funds having a lot of European stocks in them, so ETF sellers make, say, SP500 ETFs that track precisely the index but are actually mainly invested in French securities ! As you can guess, the "fail-safeness" of these ETFs is often disputed, but I'm pretty sure at least 80% of the ETFs investors chose are of this kind.
As for risks in ETF : most of the ETFs in Europe are managed in a "synthetic" way. That means managers of the ETF don't actually hold the stocks you'd think they hold, but rather have a complicated mix of assets (consisting in a few stocks, but also bonds, cash and a lot of options) that ultimately achieves the same performance as the index. They do so for a few reasons : it's easier to track precisely complicated indexes whose composition tends to evolve frequently, it reduces fees and, for fiscal reasons, they are sometimes preferred by the customers : French tax system encourages you to hold funds having a lot of European stocks in them, so ETF sellers make, say, SP500 ETFs that track precisely the index but are actually mainly invested in French securities ! As you can guess, the "fail-safeness" of these ETFs is often disputed, but I'm pretty sure at least 80% of the ETFs investors chose are of this kind.