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The Master Etf

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by Felix Salmon
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Jun 20 2008 12:00am EDT

The Master ETF

Matthew Hougan has an interesting idea:

What would your portfolio look like if you bought the five-largest ETFs on the market and weighted them based on assets under management?

  • 51% U.S. Equities (41% SPY, 10% QQQQ)
  • 39% Foreign Equities (25% EFA developed markets, 14% EEM emerging markets)
  • 10% Gold (GLD)

The costs would be just 28 basis points per year (0.28%).

But why stop at five? If you extended it to ten, the proportion in US equities would go up substantially, and five seems a very arbitrary cut-off.

Instead, just keep on going. Take all of the listed ETFs, and weight them by AUM. The result would be a much better indication of where people are really invested than a relatively narrow index like the S&P 500. There would be stocks and bonds, real estate and commodities, emerging markets and currencies - everything.

Obviously, this isn't something you could easily do at home with a Charles Schwab account. But if a financial institution offered a Master ETF along such lines, it could act as quite an attractive one-stop investment. Yes, it would suffer from the same problem that all cap-weighted indices have, of chasing bubbles - that's why gold is in the top five. But if you're OK with cap-weighted indices in general, then this could be a useful addition to the ETF space. The only problem, of course, is that if it took off, it would have to start buying shares in itself...

(Via Abnormal Returns)

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