Classic ETF Portfolios: Time-Tested Strategies Explained

ETFs have gained significant traction in recent years, offering a compelling investment option for investors of all experience levels. They can help reach long-term financial goals more effectively. Unlike traditional mutual funds, ETFs trade like stocks throughout the day, providing investors greater flexibility and usually lower transaction costs. Additionally, ETFs can offer instant diversification, exposing investors to a broad range of assets with a single trade.

Quantlake categorizes its ETF model portfolios into three main groups:

• ‍Classic: These portfolios draw inspiration from legendary investors like John Bogle, Ray Dalio, and Warren Buffett, emulating their time-tested investment strategies.
• Smart: These portfolios employ Quantlake's proprietary algorithms to seek an edge over the overall market.
• Dynamic: These portfolios aim to exploit market trends and capture superior returns by actively adjusting their asset allocation based on Quantlake analytics.

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Let's explore the Classic category, which features a set of diversified portfolios characterized by:

• A small number of passive ETFs, typically between 2 & 7
• Fixed weights, maintaining consistent asset allocation across the portfolio
• Diversification across various asset classes, including stocks, bonds, and potentially real estate or commodities
• Quarterly rebalancing to ensure the portfolio remains aligned with its target allocation

‍‍Benchmarking diversified portfolios poses a challenge as it's crucial to compare "apples to apples." We picked three:

1. ‍SPDR S&P 500 ETF Trust (SPY): representing the overall US stock market
2. iShares Core U.S. Aggregate Bond ETF (AGG): capturing a broad exposure to U.S. investment-grade bonds
3. iShares Core Moderate Allocation ETF (AOM): representing a balanced portfolio of stocks and bonds

We summarized our Classic portfolios' performance in the table below.

In 2023, our Classic gained between 9.8% and 24.4% compared to 5.7% for AGG, 12.3% for AOM, and 26.1% for the SPY.

Over 3 years, the annual return of our Classic was between -0.4% and +9.2% compared to -3.3% for AGG, +0.9% for AOM, and 9.9% for the SPY.

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Classic portfolios bring the following benefits:

• diversification across stocks and bonds
• low expense ratios
• straightforward to manage and track, requiring minimal transactions and effort on the investor's part
• they adhere to a systematic and disciplined approach, reducing the influence of behavioral biases and emotional decision-making
• they are transparent, allowing investors to fully comprehend the underlying investments and their potential risks and rewards
• they are long-term focus, emphasizing consistent and sustainable growth over short-term market volatility

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Happy Long-Term Investing from the Quantlake Team!