Sanity check my DIY ETF build (Australia)

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Topic Author
stugots277
Posts: 2
Joined: Tue Jul 13, 2021 5:24 am

Sanity check my DIY ETF build (Australia)

Post by stugots277 »

Have been wanting to get started investing for a couple years now. Tried a few times and just ended up getting completely overwhelmed with the information and choices that are available to us.

Not sure what changed now, but something just clicked this time, or at least more things made more sense. So after much deliberation and a lot of back and forth on whether I should just pick up VDHG/DHHF + Thematics ETFs, I decided I would do my own build, going with a Core + Satellite approach. Reasoning was that a) VDHG/DHHF + Others defeats the sole purpose of those AIO ETFs, b) I wanted slightly less ASX exposure, c) I am cool doing manual rebalancing, d) I like having more control over it myself (when I get older can increase bonds, sell off over-performers to balance under-performers etc).

Core
Investing in Aus, most of the world and emerging markets.
  • A200 (25%)
  • VGS (30%)
  • VGE (7.5%)
Satellites
I am young and want to have a smaller portion of my portfolio that is geared towards innovation and the future. I also understand technology well (hence NDQ, ASIA, HACK) as I'm in the industry and am overall can't see a future where it doesn't have a huge influence in our lives. CURE is there because I am interested in genomics and biohacking and believe that will have a big place in our not-too-distant future. There's very minor overlap between these, which is great.
  • NDQ (15%)
  • ASIA (7.5%)
  • HACK (7.5%)
  • CURE (7.5%)
In some time (probably 10 years or so), I will add some VGB (Aussie Government Bonds) to the portfolio, and then ramp it up as I get older.

Questions
1. Core Setup - am I missing out on any important chunks of the world, or anything glaringly obvious? I did consider VAE & VISM, but there's some Asian country exposure in VGE, and VISM, well VGE will already be decently volatile, and then things start to get a bit intense (too many ETFs).
2. NDQ - I know it overlaps a bit with VGS. And also increases my exposure to the US (which probably isn't bad for performance), but, do I even need it?
3. Innovation/Future - On the above point, is there anything else that fits the theme of bio/tech/innovation? I do like the look of ARK ETFs, particularly ARKG (Genomics, hence CURE) and ARKW (Future Web, does not seem to be an ASX equivalent?) but I don't want to mess with US-Domiciled stocks, and it's also a fund reliant on one person and her team, which is also undergoing a lot of hype at the moment.

Anyways, cheers for taking the time to read. I am keen to get going!
Hockey Monkey
Posts: 93
Joined: Thu Aug 13, 2020 10:23 pm

Re: Sanity check my DIY ETF build (Australia)

Post by Hockey Monkey »

Welcome to the forum,

Your core selections look good. Note, this forum has subscribers from all over the globe so it is good to include the names of funds.

A200 - Australian 200 ETF
VGS - Vanguard MSCI Index International Shares ETF (Global Developed Large and Mid caps)
VGE - Vanguard FTSE Emerging Markets Shares ETF (Wraps the NYSE listed VWO)

You won't find much love for Thematic or Sector tilts on this forum as they have high fees, reduce diversification and do not provide an expected higher return. 37.5% is a significant portion of you portfolio. A total allocation of 0-10% might be more appropriate and do less damage if your bet doesn't pay off.

NDQ is the top 100 companies listed on a particular exchange from a time when standards were lower there than the NYSE to get listed. It makes little sense to invest based on what exchange a stock is listed on. Historically since 1972, NDQ has returned about the same as the S&P 500 but with double the volatility.

For the other thematic/concentrated options with high fees. What information do you have that is not already priced into the market? Just because you work in an industry or feel you understand technology does not equal an expectation of higher returns. Expected returns are a directly related to the price you pay for them. Right now these thematic options are some of the highest priced available and are more likely to underperform as a result.

Some good viewing. Specifically mentions NDQ and I suspect was created in response to ARK
Chasing Top Fund Managers https://www.youtube.com/watch?v=p6HrepdLSu4
fabada
Posts: 6
Joined: Fri Jun 19, 2020 3:22 am

Re: Sanity check my DIY ETF build (Australia)

Post by fabada »

Echoing what Hockey Monkey said, with a couple of extra points...

Your four satellites are pretty expensive and likely to underperform vs a cheap index fund. Why not scratch that 'tinkering' itch by allocating, say, 2-5% of your portfolio for a bunch of bets on small companies? You say you're in the sector/are interested in these things, so it's a chance to put your knowledge to the test and have some skin on the game. Of course, as Hockey Monkey said, it's unlikely you know things the market doesn't, particularly at the scale of a composite fund/ETF. But it can be very satisfying to research a few companies more thoroughly be invested in their growth (particularly if they're in areas you believe in: genomics, biohacking etc).

Also, I would be careful about manual rebalancing and giving yourself lots of control. It seems like you're already umming and ahhing, and you may find yourself stressing more than necessary about really minor issues. Often, meddling with your portfolio does more harm than good. As for manual rebalancing, you might find that in five or ten years, or even over a really busy period at work, you lose interest in jumping in every few months and sloshing things around. It also gives you another chance to hesitate/overanalyse. This is as opposed to having just broad index funds that you rebalance using inflows.

Re: NDQ, I don't know much about it, but a cursory comparison of the returns on Google shows about double the return vs S&P500 since 1981 - indeed, with higher volatility. I don't mind it, and might consider buying some myself.

Finally, I assume your job (and therefore super fund) is in Australia. Depending on your school of thought, this is already exposure to Australia. I'm also fairly young, but I decided against any specific investments in the ASX or even Australia. While it's performed excellently since inception, it's only 2-3% of the global economy and is made up of fairly uncomplicated things like rocks and banks. (I'm not just being mean: we score particularly low on economic complexity). I would reduce your ASX200 allocation. I'm biased, but I would also replace VGE with VAE. It's both slightly outperformed VGE and is .08% cheaper. Most importantly, I would rather own developing Asian economies than the likes of South Africa, Brazil and Turkey. Over the next century, the weight of population is likely to tip the scales even further East.

But lest this all just sound like criticism, these are relatively minor points. You're on the right track, well done. Remember that the most important thing is to keep your savings rate high and to just *start*. Nothing really beats time in the market.
Topic Author
stugots277
Posts: 2
Joined: Tue Jul 13, 2021 5:24 am

Re: Sanity check my DIY ETF build (Australia)

Post by stugots277 »

Hockey Monkey wrote: Tue Jul 13, 2021 6:20 am You won't find much love for Thematic or Sector tilts on this forum as they have high fees, reduce diversification and do not provide an expected higher return. 37.5% is a significant portion of you portfolio. A total allocation of 0-10% might be more appropriate and do less damage if your bet doesn't pay off.

NDQ is the top 100 companies listed on a particular exchange from a time when standards were lower there than the NYSE to get listed. It makes little sense to invest based on what exchange a stock is listed on. Historically since 1972, NDQ has returned about the same as the S&P 500 but with double the volatility.

For the other thematic/concentrated options with high fees. What information do you have that is not already priced into the market? Just because you work in an industry or feel you understand technology does not equal an expectation of higher returns. Expected returns are a directly related to the price you pay for them. Right now these thematic options are some of the highest priced available and are more likely to underperform as a result.

Some good viewing. Specifically mentions NDQ and I suspect was created in response to ARK
Chasing Top Fund Managers https://www.youtube.com/watch?v=p6HrepdLSu4
Thank you, mate. Your post, including that video was extremely sobering. Ben's history lesson on past Fund Managers mimics my initial feelings on Cathy Wood and her ETFs, he just cemented and provided conviction to close off that thought. Thought it was interesting that the MSCI Small Cap Index beat the NASDAQ by an annualised 0.26% over 1999 - 2000.

"Expected stock returns come from how much you pay for future profits, not from investing in the most hyped-up, innovative companies".

This has caused me to entirely re-think my approach, more on that below.
fabada wrote: Tue Jul 13, 2021 10:09 am Echoing what Hockey Monkey said, with a couple of extra points...

Your four satellites are pretty expensive and likely to underperform vs a cheap index fund. Why not scratch that 'tinkering' itch by allocating, say, 2-5% of your portfolio for a bunch of bets on small companies? You say you're in the sector/are interested in these things, so it's a chance to put your knowledge to the test and have some skin on the game. Of course, as Hockey Monkey said, it's unlikely you know things the market doesn't, particularly at the scale of a composite fund/ETF. But it can be very satisfying to research a few companies more thoroughly be invested in their growth (particularly if they're in areas you believe in: genomics, biohacking etc).
Initially, before watching the video above by Ben Felix, my answer would have been that I'd like to choose those satellites because it is a representation of who I am and what I believe in, and I anticipate myself being busy with other things in life such as property investments and my own business ventures so as to not have enough time to individually pick growth stocks I am interested in. But that is essentially a great example of human behaviour; being lazy and wanting to realise a lot of gains for not much work, and also tendency to be biased (emotional).

I have actually researched and picked a couple growth stocks on the ASX, and while I don't have much money invested, I found it to be highly enjoyable. So perhaps you're right, those thematics ETFs were a way to make my stable more boring investments to be more 'exciting', when I can get that elsewhere, while also lowering risk and being overall more systematic.

The only important argument I can make is that I don't trust my ability to pick individual undervalued growth stocks in certain sectors (e.g. Genomics) better than an ETF that tracks the whole sector. I am essentially betting on a handful of companies versus 100+ in a sector within an ETF. Maybe it is that I need to work out and decided if my 'tinkering' itch will be scratched by smaller bets on these themed ETFs vs picking individual growth stocks. Not sure how to come to that conclusion but, perhaps thinking about how much time I am willing to put in will lie the answer somewhere?
fabada wrote: Tue Jul 13, 2021 10:09 am Also, I would be careful about manual rebalancing and giving yourself lots of control. It seems like you're already umming and ahhing, and you may find yourself stressing more than necessary about really minor issues. Often, meddling with your portfolio does more harm than good. As for manual rebalancing, you might find that in five or ten years, or even over a really busy period at work, you lose interest in jumping in every few months and sloshing things around. It also gives you another chance to hesitate/overanalyse. This is as opposed to having just broad index funds that you rebalance using inflows.
Agreed, I am stressing over this. I can imagine if my thematic ETFs were to go through a long period of underperforming (say 10 years), I imagine it would be immensely difficult to go against human nature and want to pull myself out.
fabada wrote: Tue Jul 13, 2021 10:09 am Finally, I assume your job (and therefore super fund) is in Australia. Depending on your school of thought, this is already exposure to Australia. I'm also fairly young, but I decided against any specific investments in the ASX or even Australia. While it's performed excellently since inception, it's only 2-3% of the global economy and is made up of fairly uncomplicated things like rocks and banks. (I'm not just being mean: we score particularly low on economic complexity). I would reduce your ASX200 allocation. I'm biased, but I would also replace VGE with VAE. It's both slightly outperformed VGE and is .08% cheaper. Most importantly, I would rather own developing Asian economies than the likes of South Africa, Brazil and Turkey. Over the next century, the weight of population is likely to tip the scales even further East.
Agree with your points on Australia, hence why I wasn't okay with with VDHG or DHHF (40% Aus, way too much for me). I may consider lowering it more, but probably not much. The school of thought for having some heavier weight in Aus is that dividends are heavily franked - what are your thoughts on that topic?

With all of the above, I have re-thought out my positions, and thinking perhaps the below would be more well-rounded and better thought out, contains less risk, and isn't jumping on the 'what's hot right now' train, especially when I agree tech stocks are already priced in.

Core
  • A200 - BetaShares Australia 200 ETF (25%)
  • VGS - Vanguard MSCI Index International Shares ETF (Global Developed Large and Mid caps)(40%)
  • VAE - Vanguard FTSE Asia ex Japan (20%)
  • VISM - Vanguard MSCI International Small Companies Index(15%)
That would be if I decide to scrap the satellite approach all together. If I do continue with the satellite approach, I would simply reduce VGS, VAE, VISM and keep a much smaller percentage of my portfolio allocated to the thematics ETFs, (15-20%, as opposed to 37.5% originally. Though at that point, my ETF portfolio is overly complex (around 9 different ETFs) and will increase the chances of me messing with it. This is the part I don't know how to overcome, if anyone has some good advice, please let me know :)

Thanks again!
User avatar
andrew99999
Posts: 1021
Joined: Fri Jul 13, 2018 8:14 pm

Re: Sanity check my DIY ETF build (Australia)

Post by andrew99999 »

stugots277 wrote: Tue Jul 13, 2021 9:08 pm With all of the above, I have re-thought out my positions, and thinking perhaps the below would be more well-rounded and better thought out, contains less risk, and isn't jumping on the 'what's hot right now' train, especially when I agree tech stocks are already priced in.

Core
  • A200 - BetaShares Australia 200 ETF (25%)
  • VGS - Vanguard MSCI Index International Shares ETF (Global Developed Large and Mid caps)(40%)
  • VAE - Vanguard FTSE Asia ex Japan (20%)
  • VISM - Vanguard MSCI International Small Companies Index(15%)
That would be if I decide to scrap the satellite approach all together. If I do continue with the satellite approach, I would simply reduce VGS, VAE, VISM and keep a much smaller percentage of my portfolio allocated to the thematics ETFs, (15-20%, as opposed to 37.5% originally. Though at that point, my ETF portfolio is overly complex (around 9 different ETFs) and will increase the chances of me messing with it. This is the part I don't know how to overcome, if anyone has some good advice, please let me know :)

Thanks again!
I like that portfolio much better.
VAE is a touch on the high side for me and I would prefer a max of about 15% due to the high-risk nature, but 20% is probably ok if you are prepared to hold onto it at 20% even if there is a decade of underperformance.

As to what to do with lots of other holdings that increase your chances of tinkering — I would just leave what you have in your satellite portfolio, ignore it as though it's a separate portfolio (and don't rebalance into it) and continue with your new allocation as above.

I believe Jack Bogle's comment on the speculative part of the portfolio was no more than 5%, and don't rebalance into it. It's there to scratch an itch that some have and should be sectioned off and not refilled.

Pick a fundamentally good allocation, then get on with the rest of your life (family, job, hobbies, travel, etc). Investing, if done right, should be boring.
User avatar
asset_chaos
Posts: 2628
Joined: Tue Feb 27, 2007 5:13 pm
Location: Melbourne

Re: Sanity check my DIY ETF build (Australia)

Post by asset_chaos »

stugots277 wrote: Tue Jul 13, 2021 5:29 am Have been wanting to get started investing for a couple years now. Tried a few times and just ended up getting completely overwhelmed with the information and choices that are available to us.
Good on ya for getting going. Implementing a pretty good financial plan is much better than dithering in hopes of finding the perfect plan.
I'm in the industry and am overall can't see a future where it doesn't have a huge influence in our lives.
The standard retort to this is do you believe that this insight is unique to you or might many people think tech will impact people's lives? If the insight is not unique to you, then the stock markets have already priced in that prospect for those companies. That's what forward looking stock markets do: if everyone knows something, it's already in today's stock prices.
Regards, | | Guy
fabada
Posts: 6
Joined: Fri Jun 19, 2020 3:22 am

Re: Sanity check my DIY ETF build (Australia)

Post by fabada »

stugots277 wrote: Tue Jul 13, 2021 9:08 pm Initially, before watching the video above by Ben Felix, my answer would have been that I'd like to choose those satellites because it is a representation of who I am and what I believe in, and I anticipate myself being busy with other things in life such as property investments and my own business ventures so as to not have enough time to individually pick growth stocks I am interested in. But that is essentially a great example of human behaviour; being lazy and wanting to realise a lot of gains for not much work, and also tendency to be biased (emotional).

I have actually researched and picked a couple growth stocks on the ASX, and while I don't have much money invested, I found it to be highly enjoyable. So perhaps you're right, those thematics ETFs were a way to make my stable more boring investments to be more 'exciting', when I can get that elsewhere, while also lowering risk and being overall more systematic.

The only important argument I can make is that I don't trust my ability to pick individual undervalued growth stocks in certain sectors (e.g. Genomics) better than an ETF that tracks the whole sector. I am essentially betting on a handful of companies versus 100+ in a sector within an ETF. Maybe it is that I need to work out and decided if my 'tinkering' itch will be scratched by smaller bets on these themed ETFs vs picking individual growth stocks. Not sure how to come to that conclusion but, perhaps thinking about how much time I am willing to put in will lie the answer somewhere?
fabada wrote: Tue Jul 13, 2021 10:09 am Also, I would be careful about manual rebalancing and giving yourself lots of control. It seems like you're already umming and ahhing, and you may find yourself stressing more than necessary about really minor issues. Often, meddling with your portfolio does more harm than good. As for manual rebalancing, you might find that in five or ten years, or even over a really busy period at work, you lose interest in jumping in every few months and sloshing things around. It also gives you another chance to hesitate/overanalyse. This is as opposed to having just broad index funds that you rebalance using inflows.
Agreed, I am stressing over this. I can imagine if my thematic ETFs were to go through a long period of underperforming (say 10 years), I imagine it would be immensely difficult to go against human nature and want to pull myself out.
fabada wrote: Tue Jul 13, 2021 10:09 am Finally, I assume your job (and therefore super fund) is in Australia. Depending on your school of thought, this is already exposure to Australia. I'm also fairly young, but I decided against any specific investments in the ASX or even Australia. While it's performed excellently since inception, it's only 2-3% of the global economy and is made up of fairly uncomplicated things like rocks and banks. (I'm not just being mean: we score particularly low on economic complexity). I would reduce your ASX200 allocation. I'm biased, but I would also replace VGE with VAE. It's both slightly outperformed VGE and is .08% cheaper. Most importantly, I would rather own developing Asian economies than the likes of South Africa, Brazil and Turkey. Over the next century, the weight of population is likely to tip the scales even further East.
Agree with your points on Australia, hence why I wasn't okay with with VDHG or DHHF (40% Aus, way too much for me). I may consider lowering it more, but probably not much. The school of thought for having some heavier weight in Aus is that dividends are heavily franked - what are your thoughts on that topic?

With all of the above, I have re-thought out my positions, and thinking perhaps the below would be more well-rounded and better thought out, contains less risk, and isn't jumping on the 'what's hot right now' train, especially when I agree tech stocks are already priced in.

Core
  • A200 - BetaShares Australia 200 ETF (25%)
  • VGS - Vanguard MSCI Index International Shares ETF (Global Developed Large and Mid caps)(40%)
  • VAE - Vanguard FTSE Asia ex Japan (20%)
  • VISM - Vanguard MSCI International Small Companies Index(15%)
That would be if I decide to scrap the satellite approach all together. If I do continue with the satellite approach, I would simply reduce VGS, VAE, VISM and keep a much smaller percentage of my portfolio allocated to the thematics ETFs, (15-20%, as opposed to 37.5% originally. Though at that point, my ETF portfolio is overly complex (around 9 different ETFs) and will increase the chances of me messing with it. This is the part I don't know how to overcome, if anyone has some good advice, please let me know :)

Thanks again!
I like this four-fund portfolio more. I would still reduce A200 a bit more, but it's just personal preference/bias at this point. The important bit is to get going.

Re: sectoral ETFs to satisfy the tinkering itch. I actually think going with a few individual companies will be more fulfilling/effective at scratching that itch. A sectoral ETF is less likely to significantly outperform the market in the long-term (assuming info about the sector and ETF makeup is already priced-in), and it won't be as satisfying if/when this company that you're emotionally invested in makes it big (or, more likely, doesn't). If the point is to give yourself something a bit exciting to do so you don't go off and mess with your entire portfolio, using 2-5% of it to make educated bets on companies in spaces with which you're familiar seems more 'fun' than just buying a sectoral ETF.

Re: franked dividends as reason for overweighting Australia - I don't have particularly strong feelings/data on this. Andrew99999's website is a good primer. My gut says not to 'trust' franked dividends for a couple of reasons.

1. Inherent proximity to dividends. To give dividends, a company must quite literally give shareholders money that would otherwise stay within the business and be (hopefully) used to grow the company further. Australia's obsession with dividend investing, caused in part by franking credits etc, irks me - mostly because it's used to justify massive overconcentration in Australia. You can get pretty comparable returns with a far more diversified and resilient global portfolio.
2. Unlikely, but could be legislated out of existence in the long-term.
3. This is petty, but not angling for 'dividend investing' feels like a vote of conscience against that one uncle who's always going on about the dividends of his individual stocks. Way too much emotional investment for my taste.

So, yeah. I dunno. I don't own any property in Australia yet, so maybe my feelings on franking credits will change dramatically.

But again, well done, it's good to think of these things early. In terms of dollars-earned-per-hour, these days spent considering investment strategies will probably be some of your most profitable.
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