ITA Wealth Management

Back on July 28th I posted an entry on the importance of tilting a portfolio toward value. Also, I have been quoting frequently from Rob Arnott’s book, “The Fundamental Index” where he advocates setting up index ETFs built around fundamental metrics such as sales, cash flow, book value, and dividends. The problem, as I see it, with fundamental ETFs is not the basic concept, but rather one of fees. Any excess fees simply provide a performance anchor to the portfolio. Keep fees as low as possible.

And this is were we come to the Passive Portfolio, a portfolio built around ETFs with a tilt toward value. Throughout Arnott’s book he talks about outperforming the market by 200 to 300 basis points. That 2% to 3% advantage is significant if one can make it happen year after year. I recently checked to see how the PP is performing with respect to Vanguard’s Total Market Index, the VTSMX. Low and behold, the PP is doing better than the VTSMX by 340 basis points, and it was in the 800 plus range until the recent bear market hammered the value asset classes.

The simple point I am making is that one can accomplish what Arnott is advocation by tilting the portfolio toward value, particularly mid-cap value and small-cap value, and adding in additional diversification using emerging markets (VWO), developed international markets (VEU), REITs (VNQ), and commodities (GSG).

Lowell Herr

Photograph: Jungle buggies to carry goods deep into the jungle of Peru.