The ETF investable benchmark portfolios have proven that just as strategic diversification can be a free lunch, leveraged diversification can be a free retirement nest egg.
In 2017, the investable benchmarks significantly outperformed the ETF portfolios recommended by Warren Buffett and David Swensen. In fact, the growth benchmark gained 42%, versus 20% for Buffett and 15% for Swensen. The new ETF investable benchmark portfolio for aggressive growth investors was up by 72%.
Buffett & Swensen
Over the past decade, the Buffett & Swensen ETF portfolios delivered 8% and 6% annualized, or 115% and 81% in total return. These unleveraged growth portfolios significantly underperformed the investable benchmarks in total return and risk.
S&P 500 and Long-Term Treasuries
Over the past decade, both the S&P 500 (SPY) and long-term Treasury bonds (TLT) delivered annualized returns of 8% and 6% as well. However, neither Buffett nor Swensen recommend an allocation to TLT even though the asset class has historically delivered critical portfolio protection.
For example, during the stock market crash from 2000 to 2002, TLT delivered a 47% gain while the S&P 500 fell 38%. TLT also delivered shocking relative outperformance in 2008, 2011, and 2014 with gains of 34%, 34%, and 27% respectively.
Over the past decade, the Income & Growth (IG) investable benchmark returned 7% annualized, or 103% in total return. We estimate that the Income and Growth 2x/3x portfolios delivered annualized returns of 14% and 22%, respectively, or 274% and 642% in total return.
Given the strong growth in technology and automation, we launched Income and Tech 3x (IT 3x) for aggressive growth investors, and we predicted a mega stock market bubble ahead. Over the past decade, we estimate that IT 3x returned 32% annualized or 1,450% in total return.
However, IT 3x and the other investable benchmarks may be extremely volatile at times. These portfolios are available through a range of passive and active asset allocations, and we encourage investors to engage leverage slowly and to employ ETF PM’s overriding risk controls.
The investable benchmark asset allocations have also delivered extraordinary performance compared to many leading hedge funds. See the “risk parity” All Weather portfolio, run by Bridgewater, the world’s largest hedge fund manager.
In 2013, Bridgewater’s All Weather portfolio returned -4%, while IG 3x gained 29%. Many investors are now employing leverage in risk parity including AQR, and BlackRock, the world’s largest asset manager.
Over the past decade, the investable benchmarks significantly outperformed the ETF portfolios recommended by Buffett and Swensen. Just as strategic diversification can be a free lunch, leveraged diversification can be a free retirement nest egg.
Given this truth, and the wide range of economic environments, the best ETF portfolio is certain to change over time. See our prior versions of this article: 12/17, 6/17, 10/16, 6/16, 9/14, 6/14, 3/14, 12/13, 9/13, 9/12, 5/12, 4/10, 4/09.
Contact ETF PM to learn more.