Patrick J left an interesting comment last week about a portfolio with a certain asset allocation. This is what he had in mind:
30% — Large Cap,
30% — Europe,
10% — Small Caps,
10% — Emerging,
10% — Bonds and
10% — China
So, I tried creating a portfolio with ETFs that had these components to see how well it did in the last five years.
I did this in a pretty unscientific manner by going to the iShares website, and finding ETFs that correspond to these descriptions. I didn’t look for the lowest cost ones, or the ones that made the most sense. I could give a number of reasons for not doing that; but in fact, I took the easy way out for this.
With that in mind, here are five ETFs that I think will work for this purpose and their annualized returns in the last five years.
| Type | ETF | Return |
| Large Cap | S&P 500 Growth Index Fund (IVW) | 1.51% |
| Europe | MSCI EMU Index Fund (EZU) | 7.38% |
| Emerging | MSCI Emerging Market Index Fund (EEM) | 17.20% |
| Small | Morningstar Small Core Index Fund (JKJ) | 3.27% |
| Bonds | Barclays Aggregate Bond Fund (AGG) | 4.92% |
| China | FTSE Xinhua China Index Fund (FXI) | 20.83% (This is the return of the underlying index) |
These returns are no surprise, and since past returns are no guarantee of future returns, you shouldn’t extrapolate this too much. The thing that pretty much jumps out is that you had to be in the emerging markets to make good money in the past five years. Will the next five be like this? – I have no idea.
This exercise amazed me with the number of options I had. Within iShares itself, there were several funds that are categorized as small caps, emerging nations etc. and there are several other ETFs and mutual funds that offer the same type of funds.
It is difficult to select which fund to select even if you have a good idea of what you want to start with.
I think you have to think of at least three things before deciding to buy a fund:
Fund Type: I think fund type will probably be the first parameter. So, if you are looking to invest in Europe, do you want to invest in just the developed part, the emerging part or the entire continent? With that in mind, you can narrow down your choices.
Cost: Once, you have that laid out, the next thing is to look at cost or expense ratio of the funds. Â You want to make sure you get the fund with the lowest expense ratio as compared with its peers.
Volume: You also want to make sure that the fund has sufficient volumes, and you will be able to get out easily if the need arises.
I am sure there are several other factors, but these three are the minimum that I’d look at, if I had to get into any of these funds.
