Balanced Portfolio with Low Diversification and High Correlation in US-Centric Equity ETFs

Report created on Nov 26, 2024

Risk profile Info

4/7
Balanced
Less risk More risk

Diversification profile Info

2/5
Low Diversity
Less diversification More diversification

Positions

The portfolio is composed entirely of ETFs, with a strong focus on US equities. The largest holdings are the Schwab U.S. Dividend Equity ETF and the SPDR S&P 500 ETF Trust, each making up 30% of the portfolio. The Invesco QQQ Trust and Vanguard Total Stock Market Index Fund ETF Shares follow, comprising 20% each. This blend leans heavily on a single asset class, stocks, making up nearly all of the investment. Given the low diversification score, there's room to enhance the variety of asset classes to mitigate risk.

Growth Info

Historically, the portfolio has shown a commendable CAGR of 14.53%, indicating robust growth over time. However, it has also experienced a maximum drawdown of -32.26%, reflecting vulnerability during downturns. The concentrated nature of the portfolio suggests that its performance is heavily tied to the US market's health. While the returns are impressive, the volatility could be a concern. To improve resilience, consider incorporating more defensive assets to balance potential losses during market declines.

Projection Info

Utilizing a Monte Carlo simulation, which models potential future outcomes based on historical data, the portfolio's future looks promising. With a hypothetical initial investment, the 50th percentile projection shows a growth of 546.04%. The simulations indicate a high likelihood of positive returns, with 998 out of 1,000 simulations showing gains. However, the reliance on past performance and current asset allocation means results could vary. To potentially enhance future results, diversifying further could reduce reliance on a single market's performance.

Asset classes Info

  • Stocks
    100%

The portfolio is overwhelmingly concentrated in stocks, accounting for 99.88% of the allocation, with a negligible cash position. This heavy weighting in equities suggests a higher risk profile, as stocks are typically more volatile than other asset classes like bonds or real estate. While this can lead to higher returns, it also increases exposure to market fluctuations. To lower risk, consider diversifying into different asset classes, which can provide stability and reduce volatility, aligning more closely with a balanced risk tolerance.

Sectors Info

  • Technology
    30%
  • Financials
    13%
  • Consumer Discretionary
    11%
  • Health Care
    11%
  • Telecommunications
    9%
  • Industrials
    8%
  • Consumer Staples
    8%
  • Energy
    6%
  • Basic Materials
    2%
  • Utilities
    2%
  • Real Estate
    1%

The sector allocation leans heavily towards technology, making up 29.56% of the portfolio, followed by financial services and consumer cyclicals. This concentration highlights a potential vulnerability to sector-specific downturns. While tech has been a strong performer, its volatility can impact the portfolio significantly. A more balanced sector allocation can help mitigate risks associated with sector-specific downturns. Spreading investments across a wider range of sectors can provide a buffer against market swings, enhancing stability.

Regions Info

  • North America
    99%
  • Europe Developed
    1%

Geographically, the portfolio is overwhelmingly focused on North America, with 99.05% of assets allocated there, leaving minimal exposure to other regions. This lack of geographic diversification can make the portfolio susceptible to regional economic shifts. While the US market has shown strong performance, global diversification can offer protection against localized economic downturns. Expanding investments to include more international markets could provide additional growth opportunities and reduce overall risk.

Redundant positions Info

  • Invesco QQQ Trust
    SPDR S&P 500 ETF Trust
    Schwab U.S. Dividend Equity ETF
    Vanguard Total Stock Market Index Fund ETF Shares
    High correlation

The assets in the portfolio are highly correlated, moving in similar directions historically. This correlation suggests that the portfolio may not be as diversified as it appears, as gains and losses are likely to occur simultaneously across holdings. High correlation can limit the benefits of diversification, making the portfolio more susceptible to market-wide downturns. To enhance diversification, consider including assets with low correlation to existing holdings, which can provide a more stable performance across different market conditions.

Risk vs. return

This chart shows the Efficient Frontier, calculated using your current assets with different allocation combinations. It highlights the best balance between risk and return based on historical data. "Efficient" portfolios maximize returns for a given risk or minimize risk for a given return. Portfolios below the curve are less efficient. This is informational and not a recommendation to buy or sell any assets.

Click on the colored dots to explore allocations.

The portfolio optimization chart suggests focusing first on reducing asset overlap before pursuing further optimization. High correlation among assets indicates limited diversification benefits. By moving along the efficient frontier, one can achieve a riskier or more conservative portfolio. To optimize, consider reallocating investments to reduce correlation and enhance diversification. This approach can lead to a more balanced risk-return profile, aligning better with personal financial goals and risk tolerance.

Dividends Info

  • Invesco QQQ Trust 0.60%
  • Schwab U.S. Dividend Equity ETF 3.30%
  • SPDR S&P 500 ETF Trust 1.20%
  • Vanguard Total Stock Market Index Fund ETF Shares 1.30%
  • Weighted yield (per year) 1.73%

The portfolio's dividend yield stands at 1.73%, with the Schwab U.S. Dividend Equity ETF contributing the highest yield at 3.3%. While dividends provide a steady income stream, the overall yield is modest, reflecting the growth-oriented nature of the portfolio. Increasing exposure to higher-yielding assets could enhance income, though it's essential to balance this with the portfolio's growth objectives. A diversified approach to dividend-paying assets can provide a reliable income source while maintaining growth potential.

Ongoing product costs Info

  • Invesco QQQ Trust 0.20%
  • Schwab U.S. Dividend Equity ETF 0.06%
  • SPDR S&P 500 ETF Trust 0.10%
  • Vanguard Total Stock Market Index Fund ETF Shares 0.03%
  • Weighted costs total (per year) 0.09%

The portfolio's total expense ratio is relatively low at 0.09%, with individual costs ranging from 0.03% to 0.2% across holdings. This cost efficiency is beneficial, as lower fees can significantly enhance net returns over time. While the current costs are favorable, it's important to regularly review and ensure that the expense ratios remain competitive. Keeping investment costs low is a crucial component of maximizing returns, and staying vigilant about fees can contribute to long-term financial success.

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