Remember Ron Lieber’s catchy little slogan? "Index (mostly). Save a ton. Reallocate infrequently." Turns out, here’s a new ETF out there which doesn’t just do the indexing for you, it does the reallocation as well. To be precise, there are three of these ETF-squareds, and they’re listed on the Amex under the tickers symbols PTO, PAO, and PCA. All of them, interestingly, comprise nothing but other ETFs.
PTO is the most aggressive, with 90% equity and 10% debt; PCA is the most conservative, with 60% equity and 40% debt. All of them have a 5% or 6% real-estate component (included in equity), with the rest of the equity split roughly 42-58 between US stocks and the rest of the world. Both the equity and the bond holdings are very diversified, and there’s even a small 2% to 3% stake in commodities and currencies, included in the debt allocation.
All of these seem like pretty sensible allocations, depending on your risk profile. And the funds seem to reallocate sensibly too:
The underlying indexes are rebalanced on a quarterly schedule but can be rebalanced more often if market conditions cause the indexes to deviate from their targeted risk levels.
I have two issues with these ETFs. The first is that, since they’re sponsored by PowerShares, PowerShares also gets first dibs on providing the underlying ETFs, even if those undelying PowerShares ETFs might not be the best or cheapest option.
And then there’s the whole question of the value of rebalancing. The ETF-squareds charge a fee of 25bp on top of the fees charged by the underlying ETFs. Basically, it’s a fee charged for the quarterly rebalancing service.
Now you don’t need to reallocate quarterly: annually is just fine, especially if the reallocation involves actually selling some of your holdings, rather than just investing new savings so as to rebalance your portfolio. But just how important is reallocation, and is it worth paying PowerShares 25bp per year for them to do it for you? Has anybody tried to quantify the costs of not reallocting, or of doing it badly?