Asset Allocation & Rebalancing Review | 10 Dec 2013

It’s the gift that keeps on giving: US stocks. Equities in these United States are up 30% year-to-date, based on our ETF proxy (Vanguard Total Stock Market (VTI)). It’s debatable if this asset class is precariously defying gravity or accurately reflecting stronger fundamentals. In any case, it’s a sight to behold. A 30% gain for a trailing US equities isn’t unprecedented, but it’s neither common nor enduring. Whatever the future holds, this much is clear: if your strategy was light on US stocks this year, your results probably look a bit pale against passive strategy benchmarks that hold market-value weights for this year’s leader.

Let’s not forget that there are other asset classes in the investment universe, and a wide array of gains and losses as well. US stocks remain at the performance pinnacle among the major asset classes at the moment, which is in sharp contrast to commodities, the current inhabitant at the bottom of the ledger with red ink approaching an 11% loss year to date, based on iPath DJ-UBS Commodity Index (DJP).
For another perspective on how the numbers compare, consider the relative changes in the asset allocation of an equal-weighted portfolio of all the major asset classes this year. The chart below reviews the portfolio’s components (based on proxy ETFs) via the current allocations vs. the range of weights year to date, using a start date of Dec. 31, 2012. The strategy for this illustration is equally weighting everything and letting the unmanaged allocations fluctuate freely through yesterday’s closing prices on December 9.

Next, let’s review how the individual markets for the major asset classes have performed by the yardstick of price. The next chart shows the year-to-date performance in relative terms through December 9 with all the proxy ETFs rebased to 100 as of Dec. 31, 2012:
Yet another view compares an ETF-based version of a passive, market-value-weighted mix of all the major asset classes–the Global Market Index Fund, or GMI.F, which is comprised of the ETFs in the table above. Here’s how GMI.F stacks up to date in 2013. This investable strategy is higher by nearly 13%, or roughly midway between the year-to-date returns for US stocks (VTI) and US bonds (BND).
Comparing the dispersion of returns for major asset classes via ETFs suggests that the rebalancing opportunity is declining overall for this strategy. Analyzing the components of GMI.F via the median absolute deviation of rolling one-year returns–the GMI.F Rebalancing Opportunity Index, as it’s labeled on these pages–suggests that there’s less potential for adding value by reweighting the portfolio in comparison with the past several weeks. In fact, the current level of dispersion is far below the peak we saw in May of this year–a peak that we now know was a great time to rebalance. Yesterday’s dispersion reading pales by comparison.
Finally, let’s compare the rolling 1-year returns (defined here as 250-trading-day performance) for the ETFs in GMI.F via boxplots. (Keep in mind that the historical records for these ETFs vary widely due to different launch dates). The gray boxes in the chart below shows the middle range of returns for each ETF—the 25th to 75th return percentiles. The red dots indicate the current 1-year return (as of Dec. 9) vs. the 1-year return from 30 trading days earlier (blue dots, which may be hiding behind the red dots in some cases). Yet again we see that US stocks (VTI) remain this season’s leading gift to investors, or at least those investors with an ample allocation to this year’s market darling.

For a deeper look at an ETF-based view of asset classes, consider the weekly updates via The ETF Asset Class Performance Review.
For more information and a recent sample, see