A U.S.-focused ETF portfolio with high correlation and low diversification

Report created on Jan 16, 2025

Risk profile Info

4/7
Balanced
Less risk More risk

Diversification profile Info

2/5
Low Diversity
Less diversification More diversification

Positions

The portfolio consists entirely of U.S.-based ETFs, each holding a 20% allocation. This structure emphasizes large-cap and broad market exposure. While this offers a strong foundation in well-established companies, it lacks diversity across asset classes and regions. This composition is typical for investors seeking stability from large-cap equities but may not provide sufficient growth opportunities from smaller or international markets. To enhance diversification, consider adding assets from different sectors or regions to balance the portfolio's risk and potential return.

Growth Info

Historically, the portfolio has delivered a Compound Annual Growth Rate (CAGR) of 14.86%, indicating strong past performance. However, it experienced a significant max drawdown of -33.71%, highlighting vulnerability during market downturns. This performance surpasses many benchmarks, yet it's crucial to recognize that past success doesn't ensure future gains. To mitigate potential losses, consider diversifying across asset classes and sectors. This can help cushion the portfolio against future volatility while maintaining the potential for attractive returns.

Projection Info

Monte Carlo simulations project a wide range of potential outcomes, with a 50th percentile return of 605.21% and a 5th percentile return of 103.63%. This method uses historical data to predict future performance, but it's not foolproof. While the portfolio's projected annualized return of 15.94% is promising, it's essential to remember that these results aren't guaranteed. To improve confidence in future outcomes, consider rebalancing to include less correlated assets, which can provide more stability in unpredictable markets.

Asset classes Info

  • Stocks
    100%

The portfolio is heavily weighted towards stocks at 99.72%, with negligible cash and bond holdings. Such concentration in equities can lead to higher returns but also increases risk, especially during market downturns. A more balanced allocation with bonds or alternative assets could reduce volatility and provide more consistent returns. This shift would align the portfolio better with typical balanced funds, which often include a mix of stocks, bonds, and cash for a smoother risk-return profile.

Sectors Info

  • Technology
    31%
  • Financials
    13%
  • Consumer Discretionary
    12%
  • Health Care
    11%
  • Telecommunications
    9%
  • Industrials
    8%
  • Consumer Staples
    6%
  • Energy
    5%
  • Basic Materials
    2%
  • Utilities
    2%
  • Real Estate
    2%

The portfolio is dominated by the technology sector at 31.41%, with significant allocations in financial services and consumer cyclicals. This concentration could result in higher volatility, particularly if these sectors face downturns. While tech stocks have driven recent market gains, they can be sensitive to interest rate changes. To mitigate sector-specific risks, consider reallocating some assets to underrepresented sectors like utilities or real estate, which may offer more stability and income during volatile periods.

Regions Info

  • North America
    99%
  • Europe Developed
    1%

With 99.43% of assets in North America, the portfolio lacks geographic diversification. This heavy reliance on the U.S. market exposes the portfolio to regional economic risks. While the U.S. market has been strong, international diversification can help buffer against domestic downturns. Consider adding exposure to developed and emerging markets, which can provide growth opportunities and reduce reliance on a single economic region. This approach aligns with global diversification strategies, offering a broader range of potential returns.

Redundant positions Info

  • Schwab U.S. Large-Cap ETF
    Vanguard S&P 500 ETF
    Schwab U.S. Broad Market ETF
    Schwab U.S. Large-Cap Growth ETF
    High correlation

Several assets in the portfolio, such as the Schwab U.S. Large-Cap ETF and Vanguard S&P 500 ETF, are highly correlated. This means they tend to move together, reducing the diversification benefits. In times of market stress, such correlation can amplify losses. To enhance diversification, consider replacing some of these overlapping assets with those that have historically shown lower correlation. This adjustment can provide a more resilient portfolio structure, better equipped to handle market fluctuations.

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 current portfolio isn't optimized along the Efficient Frontier due to high asset correlation and lack of diversification. The Efficient Frontier represents the best possible risk-return ratio for a given set of investments. To improve efficiency, consider reducing overlapping assets and incorporating a broader mix of asset classes. This reallocation can help achieve a more optimal balance between risk and return, enhancing the portfolio's potential for long-term growth while managing downside risks effectively.

Dividends Info

  • Schwab U.S. Broad Market ETF 0.90%
  • Schwab U.S. Dividend Equity ETF 3.60%
  • Schwab U.S. Large-Cap Growth ETF 0.40%
  • Schwab U.S. Large-Cap ETF 2.00%
  • Vanguard S&P 500 ETF 1.20%
  • Weighted yield (per year) 1.62%

The portfolio's dividend yield is 1.62%, with contributions mainly from the Schwab U.S. Dividend Equity ETF at 3.6%. Dividends can provide a steady income stream, beneficial for investors seeking regular cash flow. However, the overall yield is modest, reflecting the growth focus of the portfolio. To enhance income, consider increasing allocations to dividend-focused funds or stocks. This can improve cash flow while maintaining growth potential, balancing income needs with long-term capital appreciation.

Ongoing product costs Info

  • Schwab U.S. Broad Market ETF 0.03%
  • Schwab U.S. Dividend Equity ETF 0.06%
  • Schwab U.S. Large-Cap Growth ETF 0.04%
  • Schwab U.S. Large-Cap ETF 0.03%
  • Vanguard S&P 500 ETF 0.03%
  • Weighted costs total (per year) 0.04%

The portfolio's total expense ratio is impressively low at 0.04%, thanks to the selection of cost-effective ETFs. This low-cost structure supports better long-term performance by minimizing the drag on returns. It's crucial to maintain this advantage by regularly reviewing the fees of the current holdings and any new additions. Keeping costs in check ensures more of your investment stays in the market, compounding over time and enhancing overall portfolio growth.

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