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Lazy Portfolio

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  1. #1

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    Lazy Portfolio

    What are your thoughts on constructing something like a three-fund portfolio using index funds that are readily available in Hong Kong?

    I was thinking of having one index fund specifically for US stocks because these make up around 50% of the total equities market. A second index fund would cover world stocks and a third index fund for bonds.

    Looking on the list of available ETFs on the HK Exchange website, I have come up with these for consideration:

    1) Vanguard S&P 500 Index ETF (stock code 3140, expense ratio=0.25%pa)
    2) db x-trackers MSCI World Index UCITS ETF (stock code 3019, expense ratio=0.45%pa)
    3) ABF Pan Asia Bond Index Fund (stock code 2821, expense ratio=0.25%pa)

    Any other ideas for a three-fund portfolio set-up from anyone?


  2. #2

    The problem with many HK listed ETF's is their low to very low trading volumes. Apart from HK and China ETF's I'd rather buy a US listed ETF. (Schwab and E-Trade have offices in HK so you don't have to send your money to US to trade).

    db x-trackers MSCI World Index UCITS ETF #3019 - because of the way the MSCI World Index is drawn up US makes up over 50% of it and China and India don't appear in the top 9 country allocations. This will overlap heavily with your S&P 500 ETF and for a medium to long-term portfolio the minimal China and India weightings are likely to hurt your future gains.

    To get a low to negative correlation with equities you want a bond ETF that contains some US Treasuries. These are where people run to in times of turmoil. Not Asian bonds. Asian bonds are probably quite highly correlated with asian equities.


  3. #3

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    Good point about the overlap between MSCI World Index and S&P 500 ETFs, and the lack of coverage on emerging market stocks. I would now also consider adding one extra ETF:


    db-x-trackers MSCI Emerging Markets Index UCITS ETF (stock code 3009, expense ratio 0.65% pa)


    The US stock overlap can be resolved by managing the fund allocation percentages. For example if my target equity allocation percentages are:
    US stocks: 65%
    International - non-US developed markets: 20%
    International - emerging markets: 15%


    I could invest approximately in this way:
    1) Vanguard S&P 500 Index ETF: 35%
    2) db x-trackers MSCI World Index ETF: 50%
    3) db x-trackers MSCI Emerging Markets Index ETF: 15%


    The lower expense ratio for the Vanguard ETF (0.25% vs 0.45%) makes it more attractive for investing in US stocks, I think?


    The low trading volume of the ETFs may not be a problem, if my understanding is correct from what I have read on the internet (which cannot always be trusted, of course!). The primary factors that determine the liquidity of an ETF are the composition of the ETF and the trading volume of the individual securities that make up the ETF. For the index funds I'm interested in, these should not be an issue.


    What to do with bonds has me scratching my head. With an impending interest rate hike (which seems to have been impending for the last couple of years), some people seem to worry about bond fund values dropping a lot as a result. I'll need to think more about it.


    I also had a look at the charges for some online traders...


    Charles Schwab: 8.95 USD per trade, i.e. around 70 HKD per trade
    Interactive Brokers: minimum monthly commission of 10 USD, i.e. 78 HKD is applicable for my small sums
    E-Trade: 9.99 USD per ETF trade ~78 HKD per trade


    I'll probably stick with Standard Chartered with its 0.20% commission, with no minimum charge. For an average trading amount of 6000 HKD per month, that is just 12 HKD in commission. It does however restrict me to funds only accessible in Hong Kong so that will just have to be one of my selection criteria.


  4. #4

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    Quote Originally Posted by chris_in_hk:
    The problem with many HK listed ETF's is their low to very low trading volumes.
    Looking at past news articles, this is still a very valid point. Back in 2011, Lyxor delisted its ETFs possibly because of low trading volume, so that is one risk.

  5. #5

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    Original Post Deleted
    Believe me, I'm trying to read up on this as much as I can.

    Could you please expand on what's meant by "willingness of the sponsor to make a 'useful' 2-way market" for the ETF ? Is that not the ETF sponsor's role?

    It drives me up the wall when I try to confirm how something works but find conflicting statements on different websites.

    This one says low volume increases the bid/ask spread:

    Why You Want a High-Volume ETF - TheStreet

    While this one says "It's become conventional wisdom... investors should avoid ETFs with low trading volume... This is one piece of conventional wisdom investors can ignore.":

    No Need to Avoid All Low-Volume ETFs - WSJ

    This one says: "Stick to big ETFs from major providers":

    Ask Matt: Are ETFs really that bad?

    And this one mentions the increased bid/ask spread again but says "an ETF doesn't rely on its actual volume to generate liquidity":

    http://finance.yahoo.com/news/truth-...044506434.html

    What is the truth??

  6. #6

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    Original Post Deleted
    my respect for you as someone who can teach grows exponentially with every long post of yours. Thank you!

  7. #7

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    Thanks, jrkob. I think it's back to the drawing board for me.

    Liquidity aside, just been reading up on the db x-trackers ETFs which are in fact synthetic ETFs, and these seem pretty risky. The fact sheet even states:

    "Insolvency or default of DB may lead to dealing in the shares of the Indirect Replication Funds being suspended, and the Indirect Replication Funds may suffer significant losses and may even be terminated"