Murray Coleman
Wed May 24, 7:00 PM ET
Allan Roth, a Colorado Springs, Colo., adviser, has found exchange traded funds to be a strong alternative to traditional mutual funds.
"Of the new money coming into our firm, about two-thirds of the equity investments are going into ETFs," said Roth, 48.
Over five years, his portfolio returned an average annual 6.62% compared to 1.09% for Vanguard 500 Index Fund (Nasdaq:VFINX - News).
Over three years, he has returned an annual average 19.83% vs. Vanguard's 12.26%.
Year to date, he's up 6.52% vs. 1.35% for the Vanguard index fund.
His performance is due to a mix of mid- and small-cap indexes that have done better than the big-cap S&P 500.
Buy And Hold
The president of Wealth Logic LLC takes a buy and hold approach. He doesn't like to pay outside managers. "I do believe there are some Warren Buffetts out there, but I don't know how to pick the next one," said Roth.
His portfolio consists of passively managed index mutual funds and ETFs. "I'm not a trader," said Roth. "I invest in the total stock market, occasionally slightly overweighting different styles or cap sizes."
He favors ETFs with broad-based benchmarks. "They're lower cost, more transparent and more diversified," said Roth. "They're also far more tax-efficient."
Don't confuse owning just a few broadly based ETFs with being under-diversified, he adds. "You can buy just two ETFs and beat the vast majority of the stock experts over a five-year period," said Roth.
His current portfolio is made up of five ETFs and one mutual fund. The ETFs include: Vanguard Emerging Markets (AMEX:VWO - News), Vanguard European Index (AMEX:VGK - News), Vanguard Pacific Index (AMEX:VPL - News), Vanguard REIT Index (AMEX:VNQ - News). The other ETF is Vanguard's Total Stock Market Index (AMEX:VTI - News).
Holds Precious Metals Fund
The only mutual fund he holds is Vanguard Precious Metals & Mining (Nasdaq:VGPMX - News). "It owns the companies that explore and mine," said Roth. "The ETFs available in this asset class own the metals themselves. Stocks have a better long-term real return than commodities."
He also likes to keep turnover low. His model portfolio turns over 13.5% annually. "That's a little high," said Roth. "Vanguard changed their index last year in the Total Stock Market fund. Normally, it should be well under 10%."
"The average mutual fund has a turnover rate of around 75%, which means the average holding period is one year and four months," said Roth. "At 13.5%, our average holding period is seven years and five months."
Roth says data show world assets roughly divided equally between U.S. and foreign markets. He recommends two-thirds of a U.S.-based investor's assets go into domestic funds.
"So I'm overweighting the U.S. because most of my clients live here and spend in U.S. dollars," said Roth.