Marotta’s 2018 eTrade Gone-Fishing Portfolio

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I had a request to add a gone-fishing portfolio limited to the commission-free exchange traded funds (ETFs) on the eTrade platform. This post explains the methodology for building that portfolio, elsewhere I have the Marotta’s 2018 eTrade Gone-Fishing Portfolio Calculator.

A gone fishing portfolio is a portfolio of just a few stocks which should weather the ups and downs of the market fairly well while only rebalancing twice a year. We recommend a gone-fishing portfolio for younger people who are just getting started with investing. For people in or near retirement or with more assets, we recommend professional management. For that reason, our calculators do not make recommendations beyond age 70.

The advantage of a commission-free gone-fishing portfolio is that you can purchase a handful of shares without paying a trading commission. The disadvantage can be that commission-free ETF choices may have a higher expense ratios than other funds with a trading commission.

For example, I was able to find the fund iShares Core Total USD Bond Market (IUSB) with an expense ratio of just 0.06%, but the only emerging market bond fund was the WisdomTree Emerging Markets Corp Bd ETF (EMCB) with an expense ratio of 0.60%. The only other foreign bond fund was iShares Core International Aggt Bd ETF (IAGG) with an expense ratio of 0.09%.

Decisions such as “Is an emerging market bond fund worth paying 0.51% more in expense ratio?” are the type of decisions that need to be made when crafting any asset allocation. The emerging market bond fund I would have preferred, Vanguard Emerging Mkts Govt Bd ETF (VWOB), has an expense ratio of 0.32%. We use this fund in our generic gone-fishing portfolio where we do not care about transaction fees, but this fund is a transaction fee fund on the eTrade platform.

In the end, I decided to use WisdomTree Emerging Markets Corp Bd ETF (EMCB) with its higher 0.60% expense ratio. This is really not a great fund. I would have preferred better choices.

If you are investing more than $2,482 in emerging market bonds you should use VWOB instead of EMCB. Trades currently cost $6.95 on the eTrade platform. Since the difference in expense ratios is 0.28% (0.60% – 0.32%), if you are investing $2,482 in EMCB you will pay $6.95 more over the next year in additional expense ratios. So purchase VWOB instead. Then, you can purchase additional shares of EMCB as you add more money. You should also purchase VWOB if you are opening an eTrade account and you have a certain number of initial free trades.

We call the technique of purchasing a large position of a fund with lower expense ratios and then making smaller subsequent purchases of a commission-free fund the “rocks and sand” technique.

The eTrade platform did not have good choices for mid-cap value and small-cap value. It did have a fairly good choice for factor investing across the entire US stock platform in the fund Global X Scientific Beta US ETF (SCIU) with an expense ratio of just 0.19%. SCIU invests about 65% in large cap and 35% in mid-cap. To supplement SCIU I included the only small value fund eTrade offered, WisdomTree US SmallCap Dividend (DES) with an expense ratio of 0.38%.

If you are wondering why we concern ourselves with expense ratios, it is because low expense ratios is one of the best indicators of future returns.

The eTrade platform offers no way of doing country specific investing. As a result, I simply used iShares Core MSCI Total Intl Stk (IXUS) with an expense ratio of 0.11% for foreign developed.

Emerging Markets also offered poor choices. The fund I prefer is Vanguard FTSE Emerging Markets (VWO) with an expense ratio of just 0.14%. Instead, the eTrade emerging market choices are NuShares ESG Emerging Markets Equity (NUEM) with an expense ratio of 0.45% and JPMorgan Diversified Return EMkts Eq (JPEM) with an expense ratio of 0.47%.

In the end I picked a third option, WisdomTree EmMkts ex-Stt-Ownd Entrprs (XSOE) with an expense ratio of 0.32%. XSOE is an emerging market fund that does not invest in any state owned enterprises. XSOE had a higher rating in the fi360 analysis we use and a longer track record.

The choices for Energy and REITs were good with Guggenheim S&P 500 Equal Weight Energy (RYE) with an expense ratio of 0.40% and iShares Global REIT (REET) with an expense ratio of 0.14%.

Here is the Marotta’s 2018 eTrade Gone-Fishing Portfolio Calculator for you to explore crafting an age appropriate asset allocation.

Photo used here under Flickr Creative Commons.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)