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The ETF Monkey 2016 Model Portfolio: Vanguard Implementation

Summary In a previous article, I introduced The ETF Monkey 2016 Model Portfolio. This portfolio offers my suggested model for 2016 based on careful review of the 2016 outlook from multiple high-quality research firms and/or investment providers. In that article, I also promised to build and then track practical implementations of the portfolio using ETFs from three different providers. This is the Vanguard implementation. This article is designed to be read in conjunction with the article in which I introduced The ETF Monkey 2016 Model Portfolio . In that article, I offered what I believe to be a model portfolio for 2016, based on my reading and analysis of materials related to the 2016 outlook from several top-quality sources. I further explained that I would both build and track actual implementations of this portfolio using ETFs from three major providers: Vanguard, Fidelity (featuring iShares funds) and Charles Schwab. This article features the Vanguard implementation. Overview I will start with a couple of tables. The first will briefly recap the asset classes and weightings that I identified in The ETF Monkey 2016 Model Portfolio, followed by the name and symbol of the Vanguard ETF I selected to represent that portion of the portfolio. The second will present a summary of key data for each ETF, including data points such as the expense ratio and average spread, the current dividend yield, and the size and daily volume of the fund. Combined, these will give you, in one glance, a big picture overview of the expenses and returns, as well as some idea of the fund’s tradeability. In this fashion, when I have completed my articles for all three selected providers, you will be able to do some side-by-side comparisons if you wish. Finally, one by one, I will offer other comments and data for each ETF. So let’s get started. Here is the first table, presenting my ETF selections. Asset Class Weighting ETF Name Symbol Domestic Stocks (General) 30.00% Vanguard Total Stock Market VTI Domestic Stocks (High Dividend) 5.00% Vanguard High Dividend Yield VYM Foreign Stocks – Developed 20.00% Vanguard FTSE Developed Markets VEA Foreign Stocks – Emerging Markets 7.50% Vanguard FTSE Emerging Markets VWO Foreign Stocks – Europe 5.00% Vanguard FTSE Europe VGK TIPS 15.00% Vanguard Short-Term Inflation-Protected Securities VTIP Bonds 10.00% Vanguard Total Bond Market BND REITS 7.50% Vanguard REIT VNQ Here is the second table, presenting key data points. (click to enlarge) You will likely immediately notice the strength of Vanguard’s offerings across all asset classes represented in the portfolio. With the exception of VTIP, every ETF has an inception date at least as far back as 2007 and Assets Under Management (AUM) of over $10 billion, in some cases much higher. Finally, you will notice that the expense ratio across all ETFs is as low as .05% and no higher than .15%, with 5 of the 8 coming in at or below .10%. In summary, these are long-standing, low-expense ETFs with tremendous size and trading volume, representing great liquidity. This can be important during times of market volatility. Note: In view of Vanguard’s standing in the ETF field, I will use this article as the lead, or reference, article for the three implementations. I will in some cases refer back to, and compare, the related Vanguard ETF when discussing the selections I make for the Fidelity and Charles Schwab implementations of the portfolio. With that overview in mind, let’s now take a look at each of the ETFs. Vanguard Total Stock Market I have already written an in-depth article on this ETF for Seeking Alpha, in preparation for including it in The ETF Monkey Vanguard Core Portfolio . Feel free to consider that article if you wish. VTI tracks essentially the entire investable U.S. market in a single ETF. It does so by tracking the CRSP U.S. Total Market Index . As opposed to the S&P 500, which is comprised solely of large companies (large-cap), the landscape covered by VTI also encompasses many smaller companies (mid-cap, small-cap, and even micro-cap). Such companies, while offering a higher level of risk than their larger brethren, also offer greater opportunities for growth . At .05%, VTI still carries one of the lowest expense ratios in the ETF marketplace. While the competitors I will feature from both iShares and Charles Schwab now offer an even lower .03% expense ratio, I suspect Vanguard is standing pat for now because they offer market-leading expense ratios across a wider variety of ETFs than their competitors. As of 11/30/15, VTI contains 3,791 stocks, with its Top 10 holdings comprising 15.1% of the total. As such, this ETF provides about as solid a foundation as you could hope for when developing your domestic stock allocation. Vanguard High Dividend Yield I have also covered this ETF in depth in a recent article . As it happens, in terms of page views this is the most popular article I have ever managed to write for Seeking Alpha. VYM tracks the FTSE High Dividend Yield Index, which represents the U.S.-only component of the FTSE All-World High Dividend Yield Index . This index is comprised of stocks characterized by higher than average dividend yields. It does not include REITS, and also eliminates stocks forecast to pay zero dividends over the next 12 months. It contains 435 stocks, with its Top 10 entities comprising 31.3% of the total. VYM has substantial weightings in sectors such as financials, oil & gas, telecommunications and utilities. This holding is designed to help increase the level of income generated by the portfolio. Its 3.10% yield will act as a nice supplement to the 1.93% yield offered by VTI, while VTI should offer more opportunities for growth . Vanguard FTSE Developed Markets I briefly covered this ETF as well as VWO, the ETF discussed in the next section, in this article . In The ETF Monkey Vanguard Core Portfolio, I use the Vanguard FTSE All-World ex-US ETF (NYSEARCA: VEU ) as my ETF of choice. This is an excellent vehicle if one wishes to obtain ‘comprehensive’ exposure to foreign stocks, including both developed and emerging markets. At the same time, your relative exposure is decided for you, 17.30% in emerging markets as of 11/30/15. In contrast, for The ETF Monkey 2016 Model Portfolio, I am electing to use a combination of VEA and VWO, which allows us to determine our desired allocation between developed and emerging markets. One interesting note is that Vanguard is in the process of enhancing VEA, switching to an underlying index , which includes Canada, whereas the previous index VEA tracked did not. This ETF currently contains 1,866 holdings, with the Top 10 comprising 11.3% of its assets. It also sports a wonderful .09% expense ratio, stellar for an ETF, which provides international exposure. Vanguard FTSE Emerging Markets As alluded to in the section above, this is the counterpart to VEA. This ETF invests in stocks of companies located in emerging markets around the world, such as China, Brazil, Taiwan, and South Africa. Its goal is to closely track the return of the FTSE Emerging Markets All Cap China A Transition Index . The “transition” basically refers to the fact that, as Vanguard words it, the ETF “over time will build exposure to small-capitalization stocks and China A-shares.” However, they are doing so in a manner, which will minimize the transaction costs associated with this endeavor. This ETF currently contains 3,106 holdings, with the Top 10 comprising 18.2% of its assets. It carries an expense ratio of .15%, once again impressive for an ETF, which provides exposure to emerging markets, with all associated trading costs. Vanguard FTSE Europe This ETF seeks to track the performance of the FTSE Developed Europe All Cap Index , which measures the investment return of stocks issued by companies located in the major markets of Europe. A full 72.5% of the fund’s assets are comprised of companies in the United Kingdom, France, Germany, and Switzerland. This ETF currently contains 1,238 holdings, with the Top 10 comprising 16.0% of its assets. As mentioned in the article in which I introduced The ETF Monkey 2016 Core Portfolio, my goal was to slightly increase the overall weighting, or effect, of Europe in the portfolio. In that vein, if you were to compare the two, you would see that 8 of the Top 10 companies in VGK are also in VEA , with two companies from Japan breaking the Top 10 in VEA. As noted above, this ETF carries an expense ratio of .12%. Vanguard Short-Term Inflation-Protected Securities This ETF seeks to track an index that measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years. As opposed to the iShares TIPS Bond ETF ( TIP), which I will feature in the Fidelity variant of the portfolio, this ETF keeps the maturity shorter. All TIPS have a maturity of 5 years or less, with the average duration being 2.3 years (as opposed to 8.44 years for TIP). As a result, VTIP can be expected to have less real interest rate risk, but also lower total returns relative to a longer-duration TIPS fund, such as TIP. Vanguard Total Bond Market I have already written an in-depth article on this ETF for Seeking Alpha, in preparation for including it in The ETF Monkey Vanguard Core Portfolio . Feel free to consider that article if you wish. This is a great ETF for achieving across-the-board domestic bond exposure in a single source. It contains both government and corporate bonds and maintains a moderate risk profile. It does not include bonds with a credit rating lower than Baa and has an average duration of 5.8 years. As you may be aware, concern has recently been expressed as to the safety and liquidity of bond ETFs. This article concerning a recent major default may be of interest. It features the fact that the default involved a mutual fund, not an ETF, and also that the fund invested in highly speculative and somewhat illiquid junk bonds. In contrast, BND contains 7,746 different bonds, 63.5% of its assets are in U.S. Government bonds, and no bonds rated lower than Baa are included, as noted above. Put otherwise, this is not a speculative vehicle. Vanguard REIT I briefly covered this ETF, along with two competitors, in this article . VNQ is often described as sort of the pre-eminent player in the field, the “big daddy” if you will. With an inception date of 9/23/04, 154 REITs in the portfolio, $27.39 billion in Assets Under Management (AUM), a low .12% expense ratio, and great daily trading volume leading to a wonderful average price spread of .01%, there are many reasons this ETF has been described using terms such as “the king” and “top of the charts.” This ETF tracks the MSCI US REIT Index . The Top 10 holdings comprise 35.9% of its assets, with Simon Property Group (NYSE: SPG ), its single largest holding, carrying a 7.9% weighting. Summary and Conclusion So there you have them. The 8 ETFS that make up the Vanguard implementation of my portfolio. I plan to follow up with similar articles for both Fidelity and Charles Schwab, and finally with an article that will begin the process of actually building and tracking the portfolios as of the closing price of all the components on December 31, 2015. Until then, I wish you… Happy investing!

U.S. Stocks In 2016? Keep An Eye On The Global Economy

You may not want to risk capital in overseas stocks until foreign countries and regions begin to respond to stimulus via economic expansion. Right now, most are mired in stagnation, recession or depression. Absent a desirable revival abroad, 2016 could be tough sledding for the U.S. economy and the heralded S&P 500. During the previous bull market (10/02-10/07), financial media fawned over the critical importance of diversifying one’s equity exposure across the globe. And why not? Performance for foreign exchange-traded trackers like iShares MSCI EAFE (NYSEARCA: EFA ) and iShares MSCI Emerging Markets (NYSEARCA: EEM ) far surpassed anything the S&P 500 could muster up; developed international markets doubled U.S. capital appreciation while emerging economies catapulted 350%! Indeed, when I spoke at conferences 10 years ago, attendees rarely inquired about companies listed on the NASDAQ or the New York Stock Exchange (NYSE). They wanted to know if they should add a materials exporting giant like iShares South Africa (NYSEARCA: EZA ) to their portfolios or whether or not iShares Small Cap Brazil (NYSEARCA: BRF ) would be a sensible way to tap consumer purchasing power in Latin America. Accessing overseas markets dominated speaker presentations as well as listener curiosity. In 2000, the financial planning community typically rallied around a 20% equity allocation to foreign stock. By 2007, the 20% recommendation jumped to 50%. The reason? Well-diversified investors were supposed to account for the world’s market capitalization, where one-half of the world’s market cap belonged to non-U.S. securities. So what happened to the notion of a globally diversified portfolio? Worldly investor perspectives? Could it be that, since the eurozone crisis in 2011, U.S. stocks have crushed foreign equities? Maybe it is easier for CNBC and Bloomberg to praise U.S. stock price gains while ignoring bearish price depreciation in foreign equity holdings — significant positions in the static allocation of the buy-n-hold viewership. Mainstream financial commentators may choose to focus on the progress of the S&P 500 alone. They may choose to ignore c orrective activity in small caps via the Russell 2000, high yield bonds via SPDR S&P High Yield Corporate (NYSEARCA: JNK ) and transporters via the Dow Jones Transportation Average. Yet ignoring bearishness in asset prices around the world is particularly near-sighted, if for no other reason that global economic weakness is the biggest threat to the worldwide profits and the worldwide revenue of large U.S.-based corporations. The FTSE All-World Index may be particularly relevant. This benchmark covers the overwhelming majority of the world’s investable market capitalization. Its global perspective is heavily weighted toward developed regions, including the United States (52.5%), Europe with the United Kingdom (19.5%) and Japan (8.5%). Nine of the top 10 corporate constituents are U.S. companies. Some trends are easier to spot than others. For example, the FTSE All-World Index has not appreciated in price for nearly two years. Its 200-day long-term trendline currently slopes downward. And the benchmark is roughly 9% below its summertime peak. The good news? Prices are well above their October lows. It follows that the global benchmark may or may not have completed a 16%-17% correction several months earlier. Make no mistake about it, though. Large-cap U.S. companies like Microsoft, Amazon, Facebook, General Electric and Wells Fargo are responsible for the “resilience” of the FTSE All-World Index. Either key economies around the world – Europe, the United Kingdom, China, Japan – pull out of their collective funk in 2016, or U.S. large-cap stocks will eventually buckle. Top-line revenue has already declined in every quarter of 2015; non-dollar denominate profits have also taken a toll on multi-national players. Equally worrisome, foreign demand has been noticeably weak in the export data. In sum, you may not want to risk capital in overseas stocks until foreign countries and regions begin to respond to stimulus via economic expansion. Right now, most are mired in stagnation, recession or depression. Absent a desirable revival abroad, 2016 could be tough sledding for the U.S. economy and the heralded S&P 500. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Identifying Ideas For A Low-Growth, Low-Rate Environment

Summary Our strategy looks across asset classes, currencies, geographies and sectors to identify good long-term ideas wherever they may be. This piece highlights five themes that we believe will likely prevail over the next two to three years. In the shorter-term, we believe that 2016 could potentially bring with it some significant changes across financial markets. 2016 investment outlook: Multi-asset strategies By David Millar, Head of Multi Asset, Invesco Perpetual Divergence in economic growth and monetary policy around the world has led to an increasingly volatile market environment in 2015. Specifically, while the United States (U.S.) and the United Kingdom (U.K.) have been preparing to raise interest rates from rock-bottom levels, Europe and Japan have continued to employ quantitative easing measures. China also stepped up monetary easing policies during the year through several interest rate cuts and a surprise devaluation of its currency. What is important to know about our team’s investment process is that we take a two- to three-year view of the world, which helps us avoid some of the short-term noise in the markets, looking across asset classes, currencies, geographies and sectors to identify good long-term ideas 1 wherever they may be. Going forward, we believe the following themes will likely prevail over the next two to three years: Low, but positive, global economic growth We believe that structural economic growth will remain subdued on a global basis. However, regional differences could continue, with inventory and capital expenditure concerns acting as a potential drag on consumption-led U.S. growth, and the economic slowdown in China posing a potential risk to Europe’s cyclical recovery. Interest rates to remain low At the beginning of 2015, we acknowledged that interest rates could start to rise in the U.S. and the U.K., and that impacted our appetite for having duration in the portfolio. Given the modest economic outlook, we expect interest rates to remain low over the next few years even if rates do tentatively start to rise in the US and U.K. We believe the outstanding question is whether the monetary policies that are driving these changes will be effective in sustaining a healthy economic recovery. Low inflation to continue globally We expect low inflation to continue globally, exacerbated by ongoing competitive currency devaluation. We believe underlying inflation will remain low in the face of structural factors, such as debt overhang, and that implied inflation priced into forward interest rates will remain high. Select opportunities in risk assets We believe that select opportunities exist in risk assets, but current equity valuations must be navigated with care as earnings trends show differences between regions. Within fixed income, the search for yield appears to be distorting valuations, although U.S. corporate bonds look, in our view, more fairly priced. Higher levels of market volatility to persist Volatility has risen in 2015, but we believe that divergent economic policy globally, as well as non-market forces such as political interference, could underpin persistently higher levels of absolute volatility over the coming years. Given this two- to three-year outlook of the market, in the shorter-term we believe that 2016 could potentially bring with it some significant changes across financial markets. The beginning of a rate-tightening cycle could lead to a very different landscape for investing, as compared to the past few years which were defined by very loose monetary policy. This is important for a multi-asset portfolio like ours. For example, if interest rates rise, bonds may not provide the diversification 2 investors need. Another general theme, which extends through 2016 and beyond, is the use of different policy tools around the world. Ongoing competitive currency devaluation is a theme that may dominate across Asia in particular as economies fight for their share of global trade. In this environment, taking views on individual countries rather than broad-based regions makes sense as individual countries are responding to global economic pressures in very different ways, in our view. As policy and economic factors diverge across regions, this typically underpins higher asset class volatility than we have experienced over the past few years. Learn more about Invesco Global Targeted Returns Fund (MUTF: GLTAX ). Important information The opinions of the ideas expressed are those of Invesco Multi-Asset Team and are based on current market conditions which are subject to change without notice. These opinions may differ from those of other investment professionals. Diversification does not guarantee a profit or eliminate the risk of loss. Volatility measures the amount of fluctuation in the price of a security or portfolio. About risk There is a risk that the Federal Reserve Board (NYSE: FRB ) and central banks may raise the federal funds and equivalent foreign rates. This risk is heightened due to the potential “tapering” of the FRB’s quantitative easing program and other similar foreign central bank actions, which may expose fixed income investments to heightened volatility and reduced liquidity, particularly those with longer maturities. As a result, the value of the Fund’s investments and share price may decline. Changes in central bank policies could also increase shareholder redemptions, which may increase portfolio turnover and fund transaction costs. Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested. These risks are greater for the Fund than most other funds because its investment strategy is implemented primarily through derivatives rather than direct investments in more traditional securities. The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues. The Fund is subject to the risks of the underlying funds. Market fluctuations may change the target weightings in the underlying funds and certain factors may cause the Fund to withdraw its investments therein at a disadvantageous time. Leverage created from borrowing or certain types of transactions or instruments may impair liquidity, cause positions to be liquidated at an unfavorable time, lose more than the amount invested, or increase volatility. The Fund is non-diversified and may experience greater volatility than a more diversified investment. Short sales may cause an investor to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, exposure to potential loss is unlimited. The Fund may invest in derivatives either directly or, in certain instances, indirectly through Invesco Cayman Commodity Fund VII Ltd., a wholly owned subsidiary of the Fund organized under the laws of the Cayman Islands (Subsidiary). Because the Subsidiary is not registered under the Investment Company Act of 1940, as amended (1940 Act), the Fund, as the sole investor in the Subsidiary, will not have the protections offered to investors in U.S. registered investment companies. Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments. Debt securities are affected by changing interest rates and changes in their effective maturities and credit quality. Underlying investments may appreciate or decrease significantly in value over short periods of time and cause share values to experience significant volatility over short periods of time. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the Fund. Before investing, carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the products, visit invesco.com/fundprospectus for a prospectus/summary prospectus. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE All data provided by Invesco unless otherwise noted. Invesco Distributors, Inc. is the U.S. distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. ©2015 Invesco Ltd. All rights reserved. Identifying ideas for a low-growth, low-rate environment by Invesco Blog