Simple, Smart, Efficient: A 3 ETF Portfolio

A big problem we face whilst managing our savings is the complexity of it all. With fixed deposits yielding near zero or even negative (depending on how those are calculated) returns, perforce not just the employed but retires may need to have a look at what sort of returns, post tax, they receive.  Furthermore, some key issues need to be kept in mind: first and foremost, simplicity and secondly low cost. This allows for easy understanding of what one is doing. With low cost, keep more of what you earn and easily rebalance for continuous profit booking while making sure you are always in line with your target risk.

The solution: a three ETF portfolio. ETFs investments are generally better suited for such endeavors due to their low cost, low ticket size, no fund manager risk, diversification etc. According to Hansi Mehrotra, Financial Coach, at The Money Hans “It is best for anyone to start with a simple basket of ETFs, and then consider active funds if, and only if, you can figure how to pick them. Most people cannot.” Furthermore, such ETFs allow any saver to start small, using bite sizes investments to suit the pocket and even implement a smart SIP. The resultant basket should naturally be Low Cost with Tailored Risk and potentially enhanced Returns.  Which gets us to the next question: what kind of ETFs will be suitable for such core portfolio? First is investment in the domestic equity market. Indices like the Nifty and Sensex represents the largest listed companies which are therefore likely to weather the current pandemic better than smaller firms and are very liquid: easily bought and sold at low spreads. However, all ETFs are not equal, and investors must be aware of which one’s trade with thin spreads and low premiums. Which are large but suffer from trading volumes. For a discussion video on CNBCTV18 click through on the tweet below or here.

Our next step would be to hedge ourselves against the possibility of Indian economy not doing well. Indices such as the Nasdaq 100 (a basket of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange) allow for a global diversification i.e. twenty-seven countries are tied to companies represented in the index and more than 55% of the revenue comes from outside of the US. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others – with the correction, ideally suited to the COVID world. Together with domestic large companies (via the index) this provides the growth impetus.

But, in situations like the crash in March and a general global risk aversion, there also needs to be a balancing factor. Two popular asset classes for this purpose in India have been Government of India Bonds and Gold, ETFs for both are readily available for trading on the stock exchanges. Both are a Volatility hedge (dampens risk) and gain volumes whenever there is a Flight to safety. Expectations from this intelligent design are 10% -30% drop in standard volatility with a corresponding increase in returns in line with an efficient portfolio. Depending on proportion or each ETF,(85:15 Equity: Debt/Gold may be considered aggressive and 30% Gold or Government Bonds would be moderate) risk can be tailored to suit investor needs.

  • How much of each depends on the amount of risk you want to take, and Portfolio returns will be a function of how much of each component is included
    • 85:15 Equity: Debt/Gold portfolio is considered aggressive
    •  Holding 30% Gold or Gilt in the portfolio would be moderate.
    • NASDAQ100 is global growth investing engine and drives the returns along with Nifty
Risk0% to -29%-13% to -40%
Portfolio V/s Nifty Potential Outcomes

Source Internal Analysis. Index data across 1,2,3,4,5,7,10 yr holding periods

Note: Historical portfolios have returned between 15-20%+, past performance cannot be guaranteed or expected in the future.

Individual ETF Returns24-Sep-179/21/2020XIRR
Nippon India ETF Nifty BeES (XNSE:NIFTYBEES)103 ₹ -119.775%
Motilal Oswal NASDAQ 100 ETF (XNSE:N100)376 ₹ -778.0027%
Nippon India ETF Gold BEES (XNSE:GOLDBEES)26.66 ₹    -45.0019%
Asset Returns

Source Yahoo Finance & Reuters

Diversified Multicap Equity Funds over the same 3 year time period

Footnote for anyone attempting this exercise would be to stagger investments and use Smart SIPs (a detailed discussion on this to follow) for rebalancing. Also consider a platform for “Fill it – Shut it – Forget it” investing. Always consult with your adviser to determine the suitability of any investment.

Read more at: https://www.deccanherald.com/business/family-finance/a-three-etf-portfolio-simple-smart-efficient-900630.html

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Simple, Smart, Efficient: A 3 ETF Portfolio

Simple, Smart, Efficient: A 3 ETF Portfolio

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