On the recent webcast (available On Demand for CE Credit), Build Your Core for Less, Matthew Bartolini, Head of SPDR Americas Research at State Street Global Advisors, outlined four steps to build a core investment portfolio for investors and clients, including keeping costs low, diversify, staying disciplined and customization.
While fund fees may represent a fraction of a percentage, the actual dollar amount builds up over time. For example, over 10 years, a portfolio invested at the average US-listed mutual fund costs would have forfeited 7.9% of starting principal to fees, Bartolini calculated. As more investors realize the costs of higher fees in their investment products, more have increasingly shifted assets over to low-cost funds such as passive index-based ETFs. Furthermore, Bartolini warned that the equity market is expected to slowdown from its breakneck speeds ahead, which makes every basis point matter and puts a greater emphasis on low-cost investments.
When evaluating the cost of investing, ETF investors should carefully consider the total cost of ownership, which includes expense ratios, along with the bid/ask spread, commission fees and even tracking errors.
In response to the greater demand for low-cost investment options, Street Global Advisors recently revamped a number of its ETFs and produced the new SPDR Portfolio ETFs lineup, a suite of 15 dirt-cheap ETFs to provide exposure to a range of core equity and fixed-income asset classes. The new group of 15 SPDR “Portfolio” ETFs include:
- SPDR Portfolio Total Stock Market ETF (NYSEArca: SPTM) 0.03% expense ratio
- SPDR Portfolio Large Cap ETF (NYSEArca: SPLG) 0.03% expense ratio
- SPDR Portfolio Mid Cap ETF (NYSEArca: SPMD) 0.05% expense ratio
- SPDR Portfolio Small Cap ETF (NYSEArca: SPSM) 0.05% expense ratio
- SPDR Portfolio S&P 500® Growth ETF (NYSEArca: SPYG) 0.04% expense ratio
- SPDR Portfolio S&P 500 Value ETF (NYSEArca: SPYV) 0.04% expense ratio
- SPDR Portfolio S&P 500 High Dividend ETF (NYSEArca: SPYD) 0.07% expense ratio
- SPDR Portfolio World ex-US ETF (NYSEArca: SPDW) 0.04% expense ratio
- SPDR Portfolio Emerging Markets ETF (NYSEArca: SPEM) 0.11% expense ratio
- SPDR Portfolio Aggregate Bond ETF (NYSEArca: SPAB) 0.04% expense ratio
- SPDR Portfolio Long Term Corporate Bond ETF (NYSEArca: SPLB) 0.07% expense ratio
- SPDR Portfolio Intermediate Term Corporate Bond ETF (NYSEArca: SPIB) 0.07% expense ratio
- SPDR Portfolio Short Term Corporate Bond ETF (NYSEArca: SPSB) 0.07% expense ratio
- SPDR Portfolio Long Term Treasury ETF (NYSEArca: SPTL) 0.06% expense ratio
- SPDR Portfolio Short Term Treasury ETF (NYSEArca: SPTS) 0.06% expense ratio
When building a core portfolio, investors should also consider diversification or investing across asset classes to diminish portfolio volatility. For example, investors have traditionally paired fixed-income exposure to an equity position to limit overall drawdowns during periods of heightened risk-off selling to produced more even risk-adjusted returns over time.
Investment portfolios should also be customized to fit the investor as each person has his or her own investment goals and time horizons. Robert Forsyth III, Head of SPDR Americas Investment Strategy for State Street Global Advisors, argued that investors’ risk tolerance, investment horizon and return targets also evolve as they come to different stages of life. For example, a conservative portfolio would look something like 80% bonds, 10% international stocks and 10% US stocks. In contrast, an aggressive investment portfolio would have something like a 10% bond exposure, 43% international stocks and 47% U.S. stocks. Potential investors, though, should be aware that as they take on more risk, or include greater equity exposure, they are will be exposed to greater potential drawdowns during volatile periods, but on the upside, more aggressive portfolios could generate greater returns over time.
“A more risk averse profile will allocate more to bonds while a risk seeking profile will allocate more to stocks,” Forsyth said.
Finally, as we build a diversified core portfolio, investors should stay disciplined or keep portfolios on course with regular rebalancing. If you are a risk-adverse investor and want a more conservative portfolio, one should regularly rebalance to keep his or her bond and stock allocations in line with the original positioning, regardless of how the assets have performed year-over-year. The same is true for investors of various risk tolerance.
Bartolini pointed out that an investor can tailor equity allocations to achieve specific objectives. With ETFs, investors can focus on specific factors like growth and income through SPYG and SPYD, respectively, or look to segments that represent long-term opportunities, improving valuations and demographic shifts through options like SPYV, SPSM and SPEM.
Investors can also tialor their fixed-income allocations to achieve specific goals. For example, Bartolini pointed to SPTS and SPTL to shorten or lengthen duration exposure or the impact of fluctuating interest rates depending on one’s view of rate movements. Something like SPSB, SPIB, SPLB could balance income and risk exposure through precise investment-grade credit exposure.
Financial advisors who are interested in learning more about building a cheap investment portfolio can watch the webcast here on demand.