The MoneyWeek ETF portfolio review

About ten years ago, MoneyWeek’s editorial team put together a simple asset-allocation portfolio, implemented solely with index trackers – either exchange-traded funds (ETFs) or unit trusts/open-ended investment companies. This portfolio aimed to strike a balance between growth and protection. It didn’t attempt to forecast the future or time the market – instead, it aimed to cope well across a range of likely scenarios.

About the MoneyWeek ETF Portfolio

When the portfolio was first put together, the major concerns for investors were centred on monetary and fiscal policy. To quote from the very first update: “Central banks across the world are printing money. The banking system is still at death’s door. Interest rates have never been this low. Global stockmarkets have seen two vicious crashes since the start of the millennium. It feels as though the prices of most investments – shares, bonds, property – rise or fall on the whim of central bankers and politicians.”

For most of the next decade, that was a fair description of how markets worked. The banking system was gradually cleaned up (much faster in America than elsewhere) and the eurozone debt crisis passed its acute phase (although growth remained weak), but quantitative easing continued and interest rates remained low. This in turn meant that valuations of many other assets looked extremely stretched by past standards because they were priced off government bonds in an era when yields were turning negative.

That’s now changed. It may have been coming to an end by 2020 despite central bankers’ tardiness in raising rates, but the pandemic accelerated it by creating an inflation shock that left no justification for such loose policy. And so valuations have started to look saner. A greater range of investments are now priced at a level where they can deliver reasonable returns. Previously they only made much sense if rates remained low and inflation quiescent forever.

On the other hand, we face threats that were much lower on the agenda a decade ago. Markets wobbled over unrest in the Middle East or North Korea’s nuclear weapons – but in the end, there was little reward for any analysis beyond forecasting that rates would stay low for years. Reading back through these past issues and comparing them to today, one thing stands out. Investors have for the most part still not taken on board how different today looks compared with 2013, and they long for a return to a simple, low-rate world. The process of adjusting to this new reality is likely to be volatile.

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MoneyWeek ETF portfolio reviewed

Over the last few issues, I’ve reviewed the first five positions in the MoneyWeek exchange-traded fund (ETF) portfolio and the halfway mark is a good point to summarize where it now stands. The table below shows the current portfolio. The biggest change was to add back some conventional government bonds. We are still considering whether an equal-weighted US ETF might be better than a market-weighted one, given the increasing concentration of the US market, but have kept the overall 10% allocation to US equities.

Most investors will invest the cash component in whatever gives them the best risk-free interest rate (e.g. savings accounts), and it would be useful to proxy this in the portfolio. We looked at some cash and bond funds and I’ve decided to choose the Invesco US Treasury Bond 0-1 Year GBP Hedged ETF (LSE: TIGB). This has a very short duration (0.5 years), holds only US government bonds (minimal credit risk), and is hedged into sterling (no currency risk). I prefer it over iShares UK Gilts 0-5yr (LSE: IGLS), the closest gilt equivalent, because the duration on the latter is longer (2.25 years), taking us into the territory of bonds rather than cash.

In total, 50% of the portfolio is in stocks: US, Europe including the UK, UK mid-caps, Japan, and emerging markets. This reflects our overall aim: we want to grow the value of the portfolio in real terms while also dampening down volatility and tail risks, and stocks are generally viewed as the core asset for earning capital gains. It certainly makes sense that stocks should deliver better long-term returns than other major asset classes in a successful economy. In principle, companies and their investors should be receiving some of the profits from long-term economic growth, while bondholders only get back what they lend.

Stocks have beaten bonds on average: between 1900 and 2022, they outperformed by 5% a year, according to data from the Credit Suisse Global Investment Returns Yearbook. Still, the extent of outperformance depends much more than many investors realize on when you start and which countries you hold. Since 1973, for example, world stocks excluding the US beat bonds by just 0.3% per year, while US stocks did so by 2.7%. 

Starting valuations matter: when stocks are cheap relative to bonds or cash, you’ll earn higher long-term returns. We can’t control that – but we can tilt towards markets that seem cheaper, and we do. The US seems more expensive than other markets and so we underweight it (US stocks are about 60% of the global market cap). At the same time, the future is unpredictable, so we want to keep a minimum level of diversification. Thus, our current allocation to US stocks is about 20% of our overall equity holdings – broadly in line with its share of the global economy.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

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