If you read a lot about investing in the stock market, you know the term "lazy portfolio." Just like any other type of portfolio, the lazy portfolio has plusses and minuses. On the plus side, a well-constructed lazy portfolio can offer diversification and solid returns and allow for a decent night's sleep during times of market strife. The drawbacks include no realistic expectation of big winners and very little excitement (some folks do want action).
I've been inspired to create my own lazy portfolio, even though I'm not a big fan of this idea. (To follow it on Stockpickr,
click here.) I was motivated by a
principal Jeremy Siegel's version of a lazy portfolio. Predictably, his lazy portfolio was composed exclusively of WisdomTree Funds.
That was a different twist on what most of the articles I've seen on the topic suggest: generally, three to five holdings, such as a cap-weighted total market fund, a foreign fund benchmarked to the MSCI EAFE Index and maybe a
REIT fund or a Vanguard bond fund.
I have tried to tweak the concept and add value using some of the new ETFs out there. Keep in mind that this is an academic exercise to explore how some new products could offer more utility than some of the old standbys. I haven't put it into practice, for myself or my clients.
Here are the holdings and their weights:
- WisdomTree Total Earnings ETF (EXT) - Get WisdomTree U.S. Total Market Fund Report: 20%
- Rydex S&P Small Cap 600 Pure Value (RZV) - Get Invesco S&P Smallcap 600 Pure Value ETF Report: 10%
- WisdomTree Pacific Ex-Japan High-Yielding Equity Fund (DNH) : 15%
- Claymore BNY BRIC ETF (EEB) - Get Invesco BRIC ETF Report: 5%
- iShares S&P Global Energy Index Fund (IXC) - Get iShares Global Energy ETF Report: 5%
- PowerShares Water Portfolio (PHO) - Get Invesco Water Resources ETF Report: 5%
- SPDR DJ Wilshire International Real Estate (RWX) - Get SPDR Dow Jones International Real Estate ETF Report: 5%
- PowerShares DB Gold (DGL) - Get Invesco DB Gold Fund Report: 5%
- PowerShares Financial Preferred (PGF) - Get Invesco Financial Preferred ETF Report: 20%
- Advent Claymore Convertible Bond Fund (AVK) - Get Advent Convertible & Income Fund Report: 5%
- Rydex CurrencyShares Australia (FXA) - Get Invesco CurrencyShares Australian Dollar Trust Report: 5%
EXT fills the role of a "total U.S. market" fund in that it is a broad-based domestic fund, so it can be the core U.S.-based fund for a portfolio. The back-test on it covers almost five years, and in that time it beat the Russell 3000 by an average annualized 1.93%. The reason for that outperformance is that EXT, an earnings-based fund, does not tilt as heavily to value as the dividend funds.
Small-cap value over extremely long periods of time has been the best-performing "style box," which is why I chose a value fund for my lazy portfolio rather than something broader. RZV is very thinly traded, but its results stand up very well and any individual investor wanting a small-cap value product should take a look at this one.
I am not a fan of EAFE-based products; they are heavy in Western Europe and Japan. As I wrote
last month, these regions didn't provide much diversification during the last bear market and I don't expect them to do so in the future. Australia, on the other hand, by virtue of its commodity-based economy, does offer the potential for good bear-market diversification from the U.S. DNH is 88% Australia and offers a yield better than 4%.
For emerging-market exposure, the Claymore BRIC ETF is compelling. It has dramatically outperformed the better-known
iShares MSCI Emerging Market Fund
since EEB's listing last fall. The nature of the BRIC -- that's Brazil, Russia, India and China -- economies is such that EEB has less technology exposure and more materials exposure, which I believe will mean EEB continues to outperform.
The presence of the iShares Global Energy Fund is not to make a bet on energy per se. But without that fund, the portfolio would be severely underweight energy, and that's a sector I want modestly overweighted as a longer-term theme.
PHO, the water portfolio ETF, is a narrower bet on a specific outcome: that drinkable water is becoming more difficult for certain regions to access. It's definitely longer-term in nature, and should provide some slow, modest upside as this thesis gradually takes hold.
Most lazy portfolios I have seen include exposure to real estate. I chose international exposure here because the U.S. market seems more mature and staid -- and lately, volatile, which is the opposite of what you want in a lazy portfolio. Foreign exposure offers less yield, but I believe it offers more longer-term growth potential and an asset class that should not correlate to the U.S. market. By the way, this is a change of thought from when I wrote about this space
The portfolio includes gold exposure with DGL, as does every portfolio I manage. I own it in the belief that it will go up when bad things happen. It is a small but potentially volatile position whose primary role, the way I view it, is as a counter-strategy to equity holdings.
The majority of the fixed-income allocation goes to the PGF. It's very new, but in its short time on the market it hasn't moved around very much (a good thing for a fixed-income product and for a lazy portfolio). According to the PowerShares Web site, it yields 6.27%. The fund owns preferred stocks of investment-grade financial companies such as
Royal Bank of Scotland
The other, smaller fixed-income component is the AVK, which yields more than 7%. It's relatively volatile, but I believe it offers the chance for a little less sensitivity to interest rates.
The final component is Australian dollar exposure through the FXA, which obviously hedges a weak dollar and has a fine yield of 5%.
Obviously, this mix has its strengths and weaknesses. It allocates 75% to stocks, 20% to bonds and 5% to cash. It yields close to 3.4%, has a beta of 0.79 compared to 1.0 for the
and has a standard deviation of 10.83 compared to 13.02 for the S&P 500 (beta and standard deviation numbers from PortfolioScience.com).
The drawbacks include very light exposure to health care and technology. Health care seems like a very important theme for the next few years as the population gets older, and at some point technology will again provide leadership to the market. But again, that's generally a drawback of a lazy portfolio: By its nature it has to take a conservative bent, so it's not likely to enjoy the excitement (or gains) of big winners.
To repeat, I do not have this mix for any clients, and as you'll see in the disclosures I only use a couple of these ETFs in my investing. But it's an intriguing case study of how some newer investment products fit into a portfolio.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider WisdomTree Total Earnings ETF, Rydex S&P Small Cap 600 Pure Value, WisdomTree Pacific Ex-Japan High-Yielding Equity Fund, Claymore BNY BRIC ETF, iShares S&P Global Energy Index Fund, PowerShares DB Gold, PowerShares Financial Preferred, Advent Claymore Convertible Bond Fund and Rydex CurrencyShares Australia to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At the time of publication, Nusbaum was long WisdomTree Pacific Ex-Japan High-Yielding Equity Fund, Advent Claymore Convertible Bond Fund, PowerShares Water Portfolio and Rydex CurrencyShares Australia, although positions may change at any time.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
to send him an email.