Is The S&P 500 Now Safer Than a Diversifed Portfolio?


Both the media and a wide array of financial advisers preach owning a diversified portfolio. Below, I have created a hypothetical asset mix that a moderate growth investor might employ:

  • 30% iShares S&P 500 Index ETF (IVV)
  • 25% Vanguard Total Bond Market ETF (BND)
  • 12.5% iShares MSCI EAFE Index Fund ETF (EFA)
  • 7.5% SPDR S&P Mid-Cap 400 ETF (MDY)
  • 5% SPDR Barclays Capital High Yield Bond ETF (JNK)
  • 5% Vanguard Short-Term Bond ETF (BSV)
  • 5% Vanguard FTSE Emerging Markets ETF (VWO)
  • 5% iShares Russell 2000 Index ETF (IWM)
  • 2.5% Vanguard REIT ETF (VNQ)
  • 2.5% iShares Barclays TIPS Bond Fund ETF (TIP)

Perhaps ironically, the approximate weightings and approximate asset classifications (not the funds themselves) already exist in a well-known exchange-traded fund full of ETFs, the iShares S&P Growth Allocation Fund ETF (AOR). By description, AOR intends to provide a cost effective approach for capturing growth and income gains with moderate risk. Naturally, one would presume that a combination of asset classes would be less risky than an ultra-aggressive 100% allocation to large-cap stocks alone.

Here is a comparison of the moderate growth and income approach via AOR versus the “all-in” approach with an S&P 500 proxy like IVV:

Diversification Across Asset Classes? Who Needs It?
1 Month % 3 Month % 1 Year %
iShares Core S&P 500 (IVV) -2.6% -1.5% 17.3%
iShares S&P Growth Allocation (AOR) -3.3% -2.9% 8.0%

Over a single year in which large-caps produced 17%-plus and bonds, in aggregate, offered 4.5% in total return, a 62.5% growth / 37.5% income allocation model like AOR might have garnered 12.5%. Yet, AOR only served up 8%. The drag from foreign stocks, emerging stocks as well as small caps is to blame.

More unnerving, however, is the discrepancy in the shorter time intervals. Both in July and in Sept., the S&P 500 experienced significant selling pressure. An investment like AOR should have reduced some of the downside risk with more than 1/3 allocated to fixed income. The problem? High-yield bonds and real estate investment trusts struggled nearly as much as the S&P 500. Small- and mid-cap stocks suffered far worse than the S&P 500. Meanwhile, foreign developed stocks suffered dramatic declines in both July and Sept. Consequently, any help that investment grade fixed income typically provides a diversified portfolio in stock selloffs fell by the roadside.

Put another way, a combination of different asset classes designed to be less volatile and perform better in a down period actually performed worse. Over one-month and three-months periods when large-cap stocks have toiled, a diversified basket had even more trouble breathing. Specifically, AOR registered steeper declines over one-month and three-months periods than IVV.

In spite of the recent evidence suggesting that the S&P 500 has been more rewarding and less risky than a diversified portfolio, one need not look too far in the past to see a different set of circumstances. For instance, bonds, emerging markets, REITs and foreign developed stocks all added positively to account values in the last decade (2000-2009). The asset allocation mix that AOR follows would have compounded near 5% in the period, turning a $500,000 account into roughly $800,000. In contrast, the same account sitting in a S&P 500 fund would have compounded at -1.1% for a final tally of about $448,000.

In other words, buy-n-hold diversification may not always work but neither will trusting a single stock index to solve all of your asset allocation needs. In general, AOR is still a strong contender for an ETF enthusiast’s bag. You do not have to hold it through thick and thin, however. Consider selling half of an asset in your mix if the price falls below and stays below a 200-day moving average. Give the same consideration on slimming down if a stop-limit loss order has been reached. Indeed, I minimized exposure to U.S. small-cap stocks when iShares S&P Small Cap 600 Value Index ETF (IJS) hit a pre-determined stop in mid-July; IJS went on to breach its trendline later that month.

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Disclosure StatementETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETFExpert website. ETF Expert content is created independently of any advertising relationship.

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