One Way To Analyze ETF Portfolios

There are a lot of blog posts out there that offer suggestions for ETF portfolios. The suggested portfolios are either useful or not but I thought it would be useful to spend a little time on one possible way to analyze a portfolio, not so you can go implement this but so that you might think a little differently in terms of how to assess a portfolio that you put together for yourself.

I picked ten ETFs at random and input them into a spreadsheet with a simplistic weighting to explore what the sector make up might yield from something very random. The ten ETFs as follows;

iShares Chile (ECH)
iShares New Zealand (ENZL)
iShares Indonesia (EIDO)
Market Vectors Egypt (EGPT)
EG Shares Emerging Market Consumer (ECON)
iShares Emerging Market Infrastructure (EMIF)
Global X Nordic 30 (GXF)
Global X Norway 30 (NORW)
Market Vectors Small Cap India (SCIF)
Index IQ Small Cap Taiwan (TWON)

Obviously this would be a narrow based portfolio seeking specific effects and obviously it bypasses the euro, Japan and the US. It also missed countries I like including Canada and Australia.

As random as it is (I only changed one fund from the original ten) the sector weights are not insane but not ideal which is ok (explanation to follow). A point I make often is that it is very easy with funds to end up grossly overweight certain sectors, most typically financial stocks. As a crazy example a portfolio consisting of only iShares Singapore, EGPT above and Market Vectors Poland would have about a 45% weight to financials which would be a gross overweight (versus the sector weightings in the S&P 500).

The total sector weightings of the ten funds weighted simplistically (per compliance I need to be vague on this point) worked out as follows;

Tech 5.7% versus 19.3% for the SPX
Financials 16.8% versus 15.6% for SPX
Energy 10.1% versus 11.4% for SPX
Health Care 2.1% versus 11.1% for SPX
Consumer (staples plus discretionary) 21.4% versus 21.2% for SPX
Industrials 15.4% versus 10.6% for SPX
Materials 11.5% versus 3.6% for SPX
Utilities 7% versus 3.4% for SPX
Telecom 6.1% versus 3.0% for SPX

Maybe you think the sector weightings are insane. The tech and health care underweights are extreme in my opinion and the materials overweight would be a little rough as well but you might disagree which is fine. What I think is clear is that as a starting point it would be easy to tweak this in any direction someone wanted to go. One tech sector fund and one health sector fund added to take the count up to 12 funds would increase the weight in those sectors obviously and it would shave a few percentage points off the materials exposure.

Obviously any interest in changing countries, like a swap out Indonesia for the Philippines for whatever reason would be easy to do with a swap of funds and in that example would increase the financial weighting some but not be wildly disruptive in terms of needing to move everything around.

The important takeaway is that the sector analysis is simple spreadsheet work done by going to the sites of the fund providers and putting the numbers into excel. The same thing can be done with countries if the sought after fund mix includes more theme funds than country funds. The provider sites also usually have information on market cap and maybe volatility as well (depends on the provider). There are other sources for this information too including Morningstar but the work is simple; plug it in and hit the sum button.

Zooming out a little; however a portfolio is constructed, obviously I prefer many more holdings and use of individual stocks, it is important to keep tabs on the stats of your portfolio. Doing so should also help reduce the extent to which you might get blindsided by some sort of event.

Hopefully it is obvious that the mix above is hypothetical and would do very badly in some sort of risk-off dollar rally situation and of the funds listed we only use two of them anywhere, EMIF and ECH.