Why use exchange traded funds (ETFs)?
"Using exchange traded funds (ETFs) in your investment portfolio, in addition to common stocks, helps an investor cover the handicap, or loss of risk-adjusted return, from investing in unprofitable stocks."
Jeffrey Cohen, President, US Advanced Computing Infrastructure, Inc.
We add ETFs that invest in stocks, bonds, the US Dollar, the VIX, short equity ETFs, and commodities to our portfolio optimization service. Sometimes it improves the outcome. We currently have three US equity index ETFs, SPY, QQQ and IWM, included in our analysis. In the past, we added up to fifteen ETFs.
Large ETFs provide a minimum bar for an optimized portfolio because it is almost costless to hold one of those ETFs and you gain the risk-return benefits of a fully diversified portfolio. Our Chicago Quantum Net Score model has an initial value of zero based on the fully diversified set of stocks analyzed (yesterday this was 1,265 'profitable' stocks and 3,107 'all' stocks). Typically, the three ETFs all score a zero.
We occasionally run a unique model of US companies that made a profit, and had a low amount of debt leverage. That model also has an initial value of zero, and the three ETFs also score approximately zero. We typically run all US listed stocks.
On September 6, 2023, investor expectations are as follows:
One explanation of the performance of ETFs is that they are market capitalization weighted, which has provided significant risk-reward benefits historically, although the cost is concentration in large-capitalization stocks. Our portfolios are evenly weighted, meaning a ten-stock portfolio starts with 10% in each stock.
For clients on request, we could code a unique model that does market capitalization weighting of portfolios, although that creates added uncertainty and 'error' due to imperfect market capitalization data from our market data provider.
ETFs can help investors focused on balancing, or offsetting, historical risk and expected return.
Large ETFs provide a minimum bar for an optimized portfolio because it is almost costless to hold one of those ETFs and you gain the risk-return benefits of a fully diversified portfolio. Our Chicago Quantum Net Score model has an initial value of zero based on the fully diversified set of stocks analyzed (yesterday this was 1,265 'profitable' stocks and 3,107 'all' stocks). Typically, the three ETFs all score a zero.
We occasionally run a unique model of US companies that made a profit, and had a low amount of debt leverage. That model also has an initial value of zero, and the three ETFs also score approximately zero. We typically run all US listed stocks.
On September 6, 2023, investor expectations are as follows:
- SPY expected return 13.6% with a risk of 2.4
- Profitable, low leverage expected return 13.8% with a risk of 3.1
- All stocks expected return 15.0% with a risk score of 4.3.
One explanation of the performance of ETFs is that they are market capitalization weighted, which has provided significant risk-reward benefits historically, although the cost is concentration in large-capitalization stocks. Our portfolios are evenly weighted, meaning a ten-stock portfolio starts with 10% in each stock.
For clients on request, we could code a unique model that does market capitalization weighting of portfolios, although that creates added uncertainty and 'error' due to imperfect market capitalization data from our market data provider.
ETFs can help investors focused on balancing, or offsetting, historical risk and expected return.
As a follow-up, we removed all ETFs from our stock run on February 16, 2023 to focus on US common stocks. The edge from that run was tiny compared to what it normally is with ETFs. We removed them from our run as it was providing an 'apples vs. oranges' analysis. We are either analyzing multiple-stock investments, or individual US common stocks.