Thanks for the your initial post introducing asset allocation to me in layman’s terms. I’m starting to get to grips with it. But now let’s get practical. How can I use ASX-traded funds to implement the allocation, once decided?
Dear Whimsical Allocation,
Below we flesh out the asset allocation summary for a hypothetical “balanced portfolio” provided in my first post with some exchange traded funds, represented by their tickers, to fill out the allocation. Of course, this is illustrative only.
GROWTH Assets – 60%
International Shares – 25%
WRLD – 15%
QUS – 5%
NDQ – 5%
Domestic Shares – 25%
AUST – 20%
QOZ – 5%
HVST – 5%
Property – 10%
RENT – 10%
DEFENSIVE Assets – 40%
Fixed Income – 30%
IAF – 15%
IHCB – 15%
Cash – 10%
AAA – 10%
A brief description of the funds is:
BetaShares WRLD and AUST – the Managed Risk Global Share Fund (WRLD) and the Managed Risk Australian Share Fund (AUST) are two managed risk funds offered by BetaShares. These provide exposure to the global and domestic equity markets respectively. In addition to providing equity exposure they both have an active risk management overlay, which changes the amount effectively allocated to stocks within set tolerances. They tend to reduce exposure to equities as volatility increases. This will effectively take some of the allocation to growth assets off the table when things get bumpy.
AUGMENTING THE CORE POSITIONS
BetaShares QUS and QOZ, the FTSE RAFI US 100 ETF and the FTSE RAFI AUSTRALIA 200 ETF use what are commonly referred to as ‘smart beta’ indices. These funds provide exposure to US and Australian shares respectively. Both strategies seek to track indices which attempt to create portfolios based on economic fundamental measures of companies (sales, cash flow, dividends and book value) rather than price driven weights (market capitalization).
The logic behind this simple but effective approach to portfolio structuring is that the market capitalization approach to constructing an index tends to overweight overvalued securities and underweight undervalued securities. QUS and QOZ seek to overcome this by systematically trading (rebalancing) to weights driven off the fundamental metrics mentioned above.
BetaShares NDQ – Nasdaq 100 ETF provides exposure to the largest 100 stocks trading on the Nasdaq exchange. These are names like Tesla, Yahoo, Microsoft, TripAdvisor, Starbucks, PayPal, Netflix…
This ETF may be a suitable vehicle to bias a portfolio for a long term structural shift in the global economy.
BetaShares HVST – Australian Dividend Harvester (ticker HVST). This holding targets a high level of cash yield and franking credits in the Australian market, offering regular yield/income for investors. This fund also has an active risk management overlay, similar to WRLD and AUST.
AMP Capital Global Property Securities Fund (Unhedged) (Managed Fund) (RENT) provides exposure to an actively managed portfolio of global property securities and real estate investment trusts (REITs).
BetaShares AAA – Aims to provide attractive and regular income distributions and a high level of capital security, and aims to generate a return that exceeds the 30 day Bank Bill Swap Rate (after fees and expenses).
BetaShares does not presently provide exchange traded vehicles for fixed income asset classes. The allocation provided refers to products manufactured by other fund managers, and we refer readers to their websites respectively to compare these fixed income offerings.
Not a quick and easy topic as you can see. But Asset Allocation is an important one to get right, if not THE most important consideration to get right.
Thanks for asking.