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VEA: Who Doesn’t Like Developed Markets With Low Expense Ratios?

Summary This fund serves a viable core holding for the international portion of an equity portfolio. Investors can customize their position by adding other small allocations. Investors need to remember the importance of international diversification even as domestic equity as thoroughly outperformed during the latest bull market. The ETF has an very reasonable expense ratio. The Vanguard FTSE Developed Markets ETF (NYSEARCA: VEA ) is a great ETF for getting exposure across the world. I love covering Vanguard ETFs because the low expense ratios and reasonable allocations regularly give me reason to be excited about an ETF being designed to benefit the investors. This is no exception, the ETF sports an expense ratio of.09%. Vanguard regularly sets the bar for creating low fee investment vehicles for investors to gain solid diversification with low costs. Holdings I grabbed the following chart to demonstrate the weight of the top 10 holdings: These sector allocations are fairly common for large international equity ETFs with a fairly passive management style and low expense ratio. In my coverage of international ETFs, I regularly see most of these companies in the top 10. If you wonder what that means for investing, it means the funds with lower expense ratios have a very material advantage. It’s hard enough to beat a lower fee fund when the sector allocations are similar, when the underlying companies are the same it becomes an absurd task. That makes the .09% expense ratio a pretty big winner for VEA. Sectors (click to enlarge) The sector allocations here are pretty similar to the benchmark and pretty similar to peers. Since the top companies are fairly similar across major international ETFs, it shouldn’t be a huge surprise that the sector weights will also be fairly similar. In a domestic fund I would consider this to be a fairly aggressive allocation. When it comes to international equity, this reflects what is available in the market. I would love to see international investing shift to include more of the defensive sectors to reduce the volatility that can plague international investments, but for now the best strategy available to shareholders is to simply utilize international investing as a way to gain further diversification for an intelligently designed domestic portfolio. Attempting to use VEA as the entire portfolio would expose investors to a substantial amount of diversifiable risk. However, using the fund within the context of a portfolio allows it to enhance diversification and create a lower level of total risk rather than a higher level. Region Japan and the United Kingdom both got huge weightings here. If there is one critique for this otherwise stellar ETF it would be that the exposure might be weighted to create a slightly lower allocation towards individual countries. I’ve got nothing against investing in Japan or in the United Kingdom, but I would like to see heavier weights for the lower countries on the list. If investors want to create the optimal international allocations, I think VEA is a perfectly reasonable place to start. I would want to add some customized exposure to the emerging markets and possibly enhance the weight of countries that are a smaller portion of the fund. I’ve been a bear on China for quite a while, but many of my bearish assumptions have been priced into the Chinese equities now so I wouldn’t be too opposed to having a small allocation there. I’d love to add some exposure to Latin America as well. Russia is another market that is still excluded from the developed markets ETF. I would want to give the emerging markets positions a much lower weighting than the developed markets position, but I wouldn’t mind a small position in those markets. Conclusion I see plenty to like in this Vanguard fund and very little to dislike. For my personal tastes, I would want to add a little bit of emerging market exposure, but a huge developed market ETF with a low expense ratio gives investors a way to grab their main international exposure so that other positions can be customized to fit in any other small allocations the investor would like. Think of this fund as an option for the core of the international piece of the portfolio. For some investors this will be enough by itself, for others it will make sense to compliment it with a few other holdings.

Dual Momentum Model Recommends Move To Bonds Or Cash

The Dual Momentum model recommended selling equities as far back as August 10th. A slight modification of the Dual Momentum model recommends holding Cash or SHY. Look-back periods make a difference in recommendations. Three metrics, as described in the second table, improve returns and reduce annual draw-downs. Momentum investors following the Dual Momentum model are currently invested in either bonds or cash depending on how strict they follow the DM guidelines. In the following table the look-back period is one year or 365 days as recommended in Gary Antonacci’s book, Dual Momentum Investing . Exchange Traded Funds representing U.S. and International Equities markets are substituted for those securities suggested in Antonacci’s book. These ETFs are commission free securities available through several discount brokerage houses. VTI covers U.S. Equities while VEU represents International Equities. If neither VTI or VEU outperforms SHY , our cutoff ETF, we move to bonds. In this momentum model an intermediate bond BIV is selected as an obvious choice. One could also use BND as the bond representative. Using the 365-Day look-back period, the current recommendation is to invest 100% in bonds. Investors may wish to wait until after the FEDs settle on an interest rate rise before making this move. (click to enlarge) An alternative model to the above DM is shown in the following screen shot. After hours of research using a Monte Carlo model, a different look-back emerges. In the following model a 30% weight is assigned to the performance over the most recent 87 calendar days while a 50% weight is assigned to the most recent 145 calendar days. To hold down portfolio volatility and reduce risk, a 20% weight is assigned to a 14 calendar day mean-variance. Following these three metrics improves performance while reducing draw-down with respect to either the S&P 500 or VTSMX benchmarks. This can also be demonstrated using out-of-sample data. Numerous portfolios are now undergoing additional testing of this three-metric model. Using these three metrics, the recommendation varies slightly from the above DM model as investors are now advised to invest 100% in SHY, the “circuit breaker” ETF. Moving to SHY or Cash was recommended as far back as August 10th . One adjustment is advised when both VTI and VEA are out of favor as is now the situation. Instead of maintaining the 30% – 50% weights assigned to the 87- and 145-day periods, reverse those percentages. The reason is to place more weight on the most recent period so as to catch the upward swing when the market begins to rebound. As for the current situation, the Dual Momentum model recommends holding 100% in bonds while the revised DM model recommends holding 100% in Cash or SHY. Both are conservative portfolio positions. (click to enlarge) Disclosure: I am/we are long SHY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Share this article with a colleague