I have an Educational Savings Account (ESA) for a nephew. Since it is the end of the year, I want to review how it has done.
First, I should start with how it is invested. There are three ETFs within the portfolio, but all three are constructed in the same fashion and by the same management company. What I decided to do with this portfolio was to follow the guidance and wisdom of Rob Arnott at Research Affiliates and discard price based indexes like the S&P 500. Instead, I am using the fundamentally weighted indexes that are offered through Invesco’s Powershares. Fundamental Indexes are different as described on the Powershares web page:
Unlike market-cap weighted indexes, PowerShares FTSE RAFI Portfolios incorporate the Fundamental Index® investment criteria of cash flow, book value, sales and dividends to determine a stock’s weight.
Assigning weights based on the size of a stock’s financial footprint can help to reduce the impact of price-distorting factors and provide a more objective representation of the market.
What I have done is invest 45% of the portfolio in the U.S. based fund, 45% in the non-US based fund, and 10% in the emerging markets based fund. Each month I make a purchase through Sharebuilder and use the purchase to perform rebalancing. There were three months the investment went to the emerging markets ETF which shows the relative underperformance of those markets during 2013.
In terms of performance, the S&P 500 returned 29.6% while my portfolio returned 19.5%. I feel okay with this because the fund performance is above my 8% baseline. These ETFs should do very well in down markets and less well in up markets. For the life of the portfolio, the return is 41.3% while the S&P 500 has returned 39.7% (the 8% baseline is at 55.7%).
For 2014, I will increase the monthly contribution (a pattern I have followed every year). With such a large return for the market in 2013, I am not expecting anything close for 2014. If the market returns less than 8%, I do expect to outperform.