Matthew Hougan has an interesting idea:
What would your portfolio look like if you bought the five-largest ETFs on the market and weighted them based on assets under management?
- 51% U.S. Equities (41% SPY, 10% QQQQ)
- 39% Foreign Equities (25% EFA developed markets, 14% EEM emerging markets)
- 10% Gold (GLD)
The costs would be just 28 basis points per year (0.28%).
But why stop at five? If you extended it to ten, the proportion in US equities would go up substantially, and five seems a very arbitrary cut-off.
Instead, just keep on going. Take all of the listed ETFs, and weight them by AUM. The result would be a much better indication of where people are really invested than a relatively narrow index like the S&P 500. There would be stocks and bonds, real estate and commodities, emerging markets and currencies – everything.
Obviously, this isn’t something you could easily do at home with a Charles Schwab account. But if a financial institution offered a Master ETF along such lines, it could act as quite an attractive one-stop investment. Yes, it would suffer from the same problem that all cap-weighted indices have, of chasing bubbles – that’s why gold is in the top five. But if you’re OK with cap-weighted indices in general, then this could be a useful addition to the ETF space. The only problem, of course, is that if it took off, it would have to start buying shares in itself…
(Via Abnormal Returns)