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‘Other Assets’ – 10% allocation.


How does an Individual Investor sort through and select from the multitude of Exchange Traded Funds (ETFs)?

Previously we used ETF screening tools and selection criteria to select REIT, EAFE & EM, U.S., Global and Canadian Equity and Bond ETF(s). Again, our aim is to build an ETF portfolio that resembles the PIAC average Pension Plan asset allocation. Using PIAC as a reference portfolio, there is ~10% allocated toward ‘Other’ assets or ‘Alternatives’. Here an Investor can add complementary exposure to the portfolio’s core. Investors may have a favourite stock or active / specialty investment manager in mind for small cap, or a particular sectors’ exposure or maybe something more exotic. Investors that want to stick with ETFs, however, can still use the ETF screening tools.

Alternatives Allocation – 10%.

ASSET MIX of PLANS at DEC 31, 2010 PIAC Allocation ETF options include Simplified allocation
       
CASH -1.52%    
CANADIAN BONDS 26.20% XBB, XSB 30%
REAL RETURN BONDS 4.58%    
MORTGAGES 0.69%    
FOREIGN BONDS 1.76% BND  
CANADIAN EQUITIES 15.99% XIU 20%
U.S. EQUITIES 6.14% VV 10%
EAFE EQUITIES 5.84% VEA 10%
EMERGING MARKETS 3.05% VWO 10%
GLOBAL EQUITIES 12.42%    
REAL ESTATE 8.86% XRE ZRE VNQ 10%
V.C. / PRIVATE EQUITY 7.24%    
INFRASTRUCTURE 4.15% CIF  
OTHER ASSETS 2.98% XAL 10%
HEDGE FUNDS 1.56%    

ETF Screening Tools and Criteria in Practice.

Using the TMX ETF screener, select Commodity & Currency & Other (Asset Class), All (Region), All (Style), All (Size), All (Sector) and All (Issuer). De-select Leveraged, Inverse, Advisor-class and ETN.

There are 37 Canadian ‘Alternatives’ ETFs. Further sort by Issuer to refine the search.

One exotic option might be the iShares ‘Alternatives Completion Portfolio Builder Fund’ (XAL) for an all-in-one complimentary exposure to the portfolios core. (Personally, I’d like to see less REIT and more Commodity exposure … but the allocations change over time as Blackrock makes periodic active calls). Claymore Broad Commodity ETF (CBR) is interesting but flawed. It doesn’t meet criteria as it breaks the ‘simplicity’ constraint. Horizons ETFs are excluded for the same reason.

There you have it. ETF screening tools are far from perfect but they can help to make the ETF sorting process more manageable.

ETF Screening Tools:     TMX     Bloomberg     IndexUniverse
 
Next time? Back to Risk Management.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
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3 Comments Post a comment
  1. Lucas M #

    Hi Doug,

    Fantastic series. I got the bond part of my portfolio together from your very early article on your PIAC allocation using BND and XSB. These have been great stabilizers in my portfolio. I also have a good bit of VIG, VEA, and VWO. The last two have taken a pounding but my overall portfolio is doing pretty well.

    Will have to look at methods and timing for re-balancing before the end of year (maybe a topic to be covered or I may have missed it).

    Again thanks for putting this together, it has been very useful.

    Lucas

    Like

    November 25, 2011

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