Paul Merriman
Sound Investing For Every Stage of Life 

Best-in-Class ETF Recommendations  
(Updated January, 2021)
By Chris Pedersen

If you have questions about the new recommendations, please submit them by email to info@paulmerriman.com and we’ll try to answer as many as we can in an upcoming podcast.

See the Best-in-Class ETF Portfolio Recommendations 2021 
https://paulmerriman.com/best-in-class-recommended-portfolios-2021/

To implement these portfolios using M1 Finance commission-free services, sign up here: 
https://m1finance.8bxp97.net/aXrzb

Find pre-made portfolio pies here: https://paulmerriman.com/m1-finance/

If you create an account at M-1 Finance via our affiliate link — which offers direct access to our recommended portfolios — The Merriman Financial Education Foundation may receive a small fee (for accounts over $1,000.) This fee will cost you nothing extra and helps support our financial education work. Thank you!

What are the best ETFs to use to implement our recommended portfolios?  

Whatever asset allocation you choose, you’ll also need to choose particular funds to invest in.  This article provides a set of recommendations to simplify that process.  We’re also updating Paul’s M1 Finance Pies so you can start with or switch to the whole set of recommendations at M1 Finance with just a few clicks.  You can see how to do that in our tutorial video at Paul's YouTube channel.

What do we mean by “best?”  Obviously, keeping expenses low is a priority, but our portfolios are based on academic research that says there have been higher returns in smaller and more value-oriented equities.  Those higher returns have come with higher volatility, but by combining several different asset classes that don’t always move together, a higher return per unit of risk is possible.  We look for low-cost, broadly-diversified ETFs in each asset class which together consistently produce tilts towards small and value.  After screening thousands, and analyzing hundreds of ETFs, here are our new best-in-class recommendations and a set of recommended alternatives.

And, here’s how those changes impact our recommended portfolios compared to the all-Vanguard (low-cost) reference, DFA reference and 2019 BIC ETF reference portfolios

What’s changed is the inclusion of the five Avantis funds (AVUS, AVUV, AVDE, AVDV and AVEM).  Avantis is relatively new to the ETF space, having been introduced a little over a year ago.  The company was founded by former DFA employees and follows a philosophy very consistent with the design of Paul’s portfolios.  Over the course of the past year, their funds have matured to where we decided it was time to include them in our evaluation.  Let’s look at the changes one-by-one so you can see our reasoning and decide for yourself whether the differences are meaningful to you.  

US Large Cap Blend:  Our previous best-in-class recommendation for this category was Vanguard’s US Total Market fund (VTI) which holds over 3,500 companies with an average size of ~$98B, a price-to-book ratio (p/b) of 3.29 at an expense ratio of 0.03%.  In contrast, Avantis AVUS holds just over 2,000 companies with an average size of ~$53.4B, a p/b of 2.81 at an expense ratio of 0.15%.  Historically, these shifts to smaller more value-oriented companies have produced added returns that would exceed the added 0.12% expense over the long-term.  That combined with AVUS having the best factor-predicted return among the alternatives we considered makes it our best-in-class ETF recommendation for this category.  

US Small Cap Value:  Our previous best-in-class recommendations for this category were SPDR S&P 600 Small Cap Value (SLYV) for tax-deferred accounts and iShares S&P Small-Cap 600 Value (IJS) for taxable accounts.  Since they follow the same index, their numbers are similar.  They both hold ~450 companies with an average size of ~$1.6B, a p/b of 1.33 at expense ratios of 0.15-0.18%.  In contrast, Avantis AVUV holds >500 companies with an average size of ~$2.2B, a p/b of 1.24 at an expense ratio of 0.25%.  The differences here are smaller, but still lead us to favor AVUV for its greater value tilt, slightly larger number of companies and slightly better factor-predicted returns.

International Large Cap Blend:  Our previous recommendation for this category was Vanguard FTSE Developed Markets ETF (VEA) which holds ~3990 companies with an average size of ~$26.6B, a p/b of ~1.52 at an expense ratio of 0.05%.  In contrast, Avantis AVDE holds ~3390 companies with an average size of ~$15.1B, a p/b of ~1.43 at an expense ratio of 0.23%.  Our analysis suggests that the expected premiums for slightly smaller and cheaper companies should justify the 0.18% increase in expenses over the long-term.  

International Small Cap Value:  Our previous recommendation for this category was WisdomTree International SmallCap Dividend Fund (DLS) which holds ~830 companies with an average size of ~$1.3B, a p/b of ~1.1 at an expense ratio of 0.58%.  In contrast, Avantis AVDV holds ~960 companies with an average size of ~$1.86B, a p/b of ~1.03 at an expense ratio of 0.36%.  In this case, we’re getting a higher number of cheaper, but slightly larger companies for substantially lower cost.  Another plus is that AVDV has a distribution yield of 1.67% vs. 2.49% for DLS making it more tax efficient since it generates smaller taxable dividend distributions.  Our factor-predicted return analysis doesn’t show substantial differences between these two ETFs, but the combination of lower expense, lower distribution yield, lower p/b and higher number of companies makes AVDV our best-in-class recommendation for this category.  

Emerging Markets: Our previous recommendation for this category was WisdomTree Emerging Markets SmCp Div ETF (DGS) which holds ~775 companies with an average size of ~$1.3B, a p/b of ~1.06 at an expense ratio of 0.63%.  In contrast, Avantis AVEM holds ~2554 companies with an average size of ~$17.1B, a p/b of ~1.42 at an expense ratio of 0.33%.  In this case, we’re getting a much higher number of slightly more expensive and significantly larger companies for substantially lower cost.  The larger size and lower value will likely reduce risk and reward, but AVEM has a distribution yield of 1.59% vs. 3.66% for DGS making it much more tax efficient since it generates smaller taxable dividend distributions.  Our factor-predicted return analysis also shows AVEM having one of the best factor-predicted returns among the alternatives considered making it our best-in-class recommendation for this category. 

Should I switch to the new recommendations?

This is something only you can decide.  If your funds are in taxable accounts, you should consider the tax implications of selling the old funds vs. the potential benefits of the new ones.  If your funds are in tax-deferred accounts, the taxes don’t matter, but your confidence in the recommendations does.  If you believe the new recommendations will serve you better based on the rationale given and any additional research you do, then go ahead and switch.  In the end, it’s probably more important that you have an investment strategy you believe in and can stick with than that you have exactly the right funds for that strategy.

Malcare WordPress Security