Leonardo da Vinci once said, "Simplicity is the ultimate sophistication." He would have loved Couch Potato ETFs. Unfortunately, they don't exist. But they should.
Back in 1991, U.S. finance writer Scott Burns said it's easy to beat most balanced mutual funds. Just split your money between a U.S. stock index and a U.S. bond index. He called it the Couch Potato Portfolio. Burns says, "If you can fog a mirror and divide by two, you can manage your own Couch Potato portfolio." History proved him right. Over 24 years, it beat most balanced mutual funds. For 13 years in a row, it has crushed the average global hedge fund. Simplicity, it appears, beats higher cost complexity.
Fifteen years ago, ROB columnist Ian McGugan brought the concept to Canadians when he was editor of MoneySense. He created the Classic Couch Potato Portfolio. It called for a three-way split between a Canadian bond index (such as the iShares XBB ETF), a Canadian stock index (XIC) and a U.S. stock index (XSP).
He followed up with a Global Couch Potato portfolio. It gets split four ways: into a Canadian bond index (XBB), a Canadian stock index (XIC), a U.S. stock index (XSP) and an international stock index (XIN). In each case, investors rebalance their portfolio annually, bringing it back to its original allocation.
MoneySense won a national publishing award with this revelation. I hoped that iShares Canada would jump to create a Couch Potato ETF. With it, investors could buy a low-cost, diversified portfolio wrapped up in a single product. But none of Canada's fund companies grabbed that gauntlet.
To be fair, some firms do offer blended ETFs. They include iShares, First Asset and Horizon. The products are diversified. Management fees are fairly low. And because they represent portfolios wrapped up into single ETFs, they might collar speculation.
For example, many investors in regular ETFs gamble on forecasts. They buy a country's stock index on this week's news, only to sell it when they think the tide will turn. This is a poor strategy. Most investors guess wrong. Blended ETFs might limit such madness.
But Canada's ETF providers have shunned what's simple. With their blended ETFs, they overweight or underweight sectors based on forecasts. It might be comforting to think that experts, with their eyes on the economy and their fingers on funds, can effectively juggle money. Reality, however, usually says otherwise.
IShares offers six blended ETFs with five-year track records. They include a Balanced Income Core Portfolio (CBD), a Balanced Growth Core Portfolio (CBN), a Conservative Core fund (XCR), a Growth Core fund (XGR), an Alternatives Completion fund (XAL) and a Global Completion fund (XGC).
Over the past five years, they averaged compounding returns between 4.62 per cent and 7.82 per cent. The Classic and the Global Couch Potato, however, managed to beat them all. They averaged 9.3 per cent and 10.4 per cent, respectively.
First Asset's blended ETFs don't have track records that are long enough to compare past results with simple Couch Potatoes. But we can look at Horizon's two blended ETFs. Their Active Diversified Income ETF (HAA) has a three-year track record. It averaged 6.5 per cent. But once again, simplicity wins. The Classic Couch Potato averaged 11.3 per cent over the same time period. The Global Couch Potato portfolio averaged 12.5 per cent.
Horizon's Seasonal Rotational ETF (HAC) has a longer track record. It averaged 7.3 per cent over the past three years and 8.1 per cent over the past five years. Over both measured periods, Couch Potatoes crushed it.
Over all, Canada's ETF providers have done a great job by offering low-cost indexes from which we can build our own portfolios. And their blended ETFs may save investors from themselves.
But these blended ETFs shun the genius of simplicity. By following Couch Potato models, they could cut management costs. They could rebalance without speculating. They could earn better returns and make da Vinci proud.
Simplicity really is the ultimate sophistication.
Blended ETF vs Couch Potato
|Fund/Portfolio||Ticker||3-yr % rtn||5-yr % rtn|
|iShares Balanced Income Core Portfolio||CBD-T||7.58||6.89|
|iShares Balanced Growth Core Portfolio||CBN-T||10.74||7.13|
|iShares Conservative Core fund||XCR-T||3.44||4.62|
|iShares Growth Core fund||XGR-T||6.52||6.52|
|iShares Alternatives Completion fund||XAL-T||6.83||7.08|
|iShares Global Completion fund||XGC-T||9.30||7.82|
|Horizon Active Diversified Income ETF||HAA-T||6.50||N/A|
|Horizon Seasonal Rotational ETF||HAC-T||7.30||8.10|
|Classic Couch Potato Portfolio||11.30||9.30|
|Global Couch Potato Portfolio||12.50||10.40|