Why Benchmark with ETFs?
Dirk By Dirk Quayle, @dquayle
President, NextCapital

Nate Most, the late American Stock Exchange executive responsible for the first U.S. exchange-traded fund, would be amazed at the $1.3 trillion market he sparked. “I never thought they would be this big,” Most told MarketWatch in an interview months before his death in 2004. At the time of Most’s comments, U.S. ETF assets totaled $180 billion.

Even more amazing has been the ability of the largest and most liquid ETFs to efficiently track securities indexes and asset classes just as they were designed. For detractors, remember trading frictions, such as commission and bid/ask spreads, are part of any index-tracking strategy in a mutual fund, separately-managed account or ETF.

Trading on an exchange, like stocks, ETFs are accessible to any investor with a brokerage account, unlike mutual funds which are bought direct, through an advisor or on a brokerage platform. It’s the ultimate open-source mutual fund. For this reason, and all of the frictions that push ETFs to be consistent and accessible trackers of securities indexes, we’ve chosen ETFs, not indexes or traditional index funds, as asset class benchmarks in LikeAssets.

By asset classifying your individual investments, mostly stocks and mutual funds, LikeAssets can pair your investments with investible benchmarks consistent with your style. We can also show you your style and asset allocation across all of your investment accounts, even across account types. Here at LikeAssets, we’ve identified a core set of ETFs that can be used to benchmark your portfolio. Our goal was to find broad, yet mutually exclusive, benchmarks as well as those most used by professionals when constructing client portfolios. And for those of you who want to know exactly what we’re using, here are the ETFs.

  • U.S. Large Cap Growth – iShares Russell 1000 Growth Index (IWF)
  • U.S. Large Cap Value – iShares Russell 1000 Value Index (IWD)
  • U.S. Small Cap Growth – iShares Russell 2000 Growth Index Fund (IWO)
  • U.S. Small Cap Value – iShares Russell 2000 Value Index Fund (IWN)
  • U.S. Real Estate – Vanguard REIT ETF (VNQ)
  • U.S. Bonds – iShares Barclays Aggregate Bond (AGG)
  • U.S. Treasury Inflation Protected Securities – iShares Barclays TIPS Bond (TIP)
  • U.S. Municipal Bonds – SPDR Barclays Municipal Bond ETF (TFI)
  • U.S. High Yield Bonds – PowerShares High Yield Corporate Bond (PHB)
  • International Developed Equity – iShares MSCI EAFE Index (EFA)
  • International Developed Bonds – SPDR Barclays Capital Intl Treasury Bond (BWX)
  • Emerging Markets Equity – Vanguard Emerging Markets ETF (VWO)
  • Commodities – iShares S&P GSCI Commodities Indexed ETF (GSG)
  • Emerging Markets Debt – PowerShares Emerging Markets Sovereigns ETF (PCY)
  • U.S. Dollars – SPDR Barclays Capital 1-3 Month T-Bill (BIL)

    Stay tuned for new and exciting ways that LikeAssets will provide more flexibility in picking benchmarks and styles to track. And let us know how you benchmark and what would be helpful for you.

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