Here’s an idea for a new ETF

Actually, not one ETF, but two! Or more! How can there be a need for a new ETF? Aren’t there enough already? Earlier this year, Motley Fool argued there are too many ETFs (1,929 at that time, probably over 2,000 by now) and they are covering pretty much every thinkable (and unthinkable) benchmark. Soon we might have more ETFs than publicly traded equities in the U.S., how crazy is that??? Why would I propose a new ETF that doesn’t already exist?

Here’s some background. I’m an index investor at heart and I like tax optimization. For so many years now, I’ve held equity index ETFs and Mutual Funds in both taxable accounts and tax-deferred accounts (both retirement and deferred compensation at work). It’s so painful to see the dividend payments in the taxable accounts getting taxed every year. Sure, it’s only about 1.9% dividend yield in the S&P500 right now but for us, that’s taxed at 15% federal, 10+% state (California!) and 3.8% Obamacare tax, for a total of almost 30% marginal tax! Isn’t there a better way? Sure! Simply put the taxable equity allocation into stocks that pay zero (or close to zero) dividends and keep the high-dividend stocks in the tax-deferred account where they can compound in peace and be taxed only once upon withdrawal rather than every year along the way! So, the two ETFs that I wish existed would exactly replicate the S&P500 if held in equal shares. But individually they’d have non-index weights and one would hold the equities with the lowest dividend yield and the other with the high-yield equities!

Notice that most folks already do this tax optimization across asset classes: Hold the tax-inefficient asset classes (bonds, REITs, etc.) in tax-deferred accounts and equities in taxable accounts. So, why not do this within the equity asset class as well for additional tax efficiency? How much extra after-tax return would we get out of this? Let’s look at the numbers…

Continue reading “Here’s an idea for a new ETF”


Why would anyone have a mortgage and a bond portfolio?

We are homeowners with a pretty sizeable mortgage but we also accumulated a nice retirement nest egg, which is actually many times larger than our mortgage. Even our taxable investments are several times larger than the mortgage. Still, we don’t pay off the mortgage because we like the benefit of leverage. We have a liability with a low-interest rate and assets with a much higher expected rate of return, so our overall expected rate of return is higher than without a mortgage. Our friend FinanciaLibre (now a defunct site) did some nice number crunching on this topic recently and we agree wholeheartedly.

Moreover, if you follow our blog you’ll also remember that we take a pretty dim view on bonds:

So, personally, we skip the bond allocation altogether. Others have written about this, too, check Physician on Fire’s 2-part guest post here and here. In light of all of this, here’s one question that occurred to us:

Why would anybody have a 30-year mortgage at about 3.50% and a bond portfolio currently paying around 1.8 to maybe 2.5% interest for safe government bonds?

Leverage works only when the asset has a higher expected return than the liability!
Continue reading “Why would anyone have a mortgage and a bond portfolio?”

Shorting an inverse ETF? A bad idea! (Or: Why “Beta-Slippage” isn’t alpha)

A while back, I came across an interesting blog post. A guest writer on the White Coat Investor blog put forward an intriguing, almost too good to be true, money-making scheme. Unfortunately, it is too good to be true. It works neither in practice nor in theory. The more I looked into this subject, the more flaws I found with the analysis and I thought people might find it useful when I share my notes here.

It would have been so nice to announce here – with great fanfare – that, yes, there is a way to consistently beat the stock market. But it wasn’t meant to be. Oh, well, sometimes it’s just as insightful to understand why things don’t work! Continue reading “Shorting an inverse ETF? A bad idea! (Or: Why “Beta-Slippage” isn’t alpha)”

The Great Bond Diversification Myth

Update: If you’re coming over to this article from Mr. French’s article over at RetirementResearcher, please note the last few paragraphs below where I shoot down his shockingly sloppy analysis.

Bonds diversify your equity portfolio risk. Everybody knows that, right? Well, how much diversification potential is there, really? Much less than we thought! (For full disclosure, though, bonds still serve a purpose, but it has nothing to do with diversification!)

Pop Quiz: Over the last 10 years, a portfolio of 80% stocks (U.S. Broad Equity Market) and 20% bonds (U.S. Aggregate Bond Market) had what correlation with the stock market?

A: 0.998

B: 0.857

C: 0.800

D: 0.683

The correct answer is A: the correlation was +0.998, so an 80/20 Stock/Bond portfolio would have been extremely highly correlated with the stock market. We might as well round it up all the way to 1.0 because from a statistical, financial and economic perspective that’s pretty much a perfect correlation. This correlation coefficient is for a broad U.S. stock market ETF (use Vanguard’s US Total Market VTI) vs. a portfolio made up of 80% Vanguard’s VTI and 20% Barclays Aggregate bond index (we used the iShares AGG total returns). Monthly returns are from 07/2006 to 07/2016. Continue reading “The Great Bond Diversification Myth”

REITs pros and cons

We live in a low-yield world. Interest rates are much lower than in recent history and this has spurred a mad “search for yield” whereby investors look for anything, really anything, that offers yield above the measly low interest rates currently prevailing in this country. REITs have greatly benefited from this trend and when my hairstylist starts telling me that he invests in REITs it makes me wonder if that sector might be a little bit overheated (brings back memories of the late 1990s when a different hairdresser in a different city gave out Tech company recommendations). Here are some pros and cons of REITs.
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List of Index ETFs and Mutual Funds

A list of (relatively) low cost index ETFs and mutual funds, their tickers, benchmark index, provider, current fee and yield (as of 12/31/2015 in most cases), dividend payment schedule and link to the fund fact sheet. I haven’t ascertained the dividend schedule for most of the funds yet. Continue reading “List of Index ETFs and Mutual Funds”