That's Not Diversification

ETF.com posted a very brief article where an advisor shared his portfolio allocation and a few high level comments about the particulars. Here's the portfolio.

He's 100% equities except he sort of isn't. He has a 10% cash buffer outside of this allocation. The idea behind being so heavy in equities is that he is taking a very long time horizon being 47 with no plans to retire anytime soon. The article describes the international exposure as being overweight but I don't think that is right. The iShares All Country World Index ETF (ACWI) has about 38% in foreign. He didn't say that was overweight, so I'm not sure what the editors had in mind with that comment, overweight versus domestic only? 

I plugged all the domestic ETFs into the correlation tool on Portfoliovisualizer.

There's almost no differentiation. VBR has a correlation in the 0.70 range with three of the funds but I don't believe that meets any threshold for low correlation but please comment if you see it otherwise.

Here's a lookback for how the portfolio did but I had to guess on the 3.4 miscellaneous. I made one version with the SPDR T-bill ETF (BIL) and one version with iShares US Momentum ETF (MTUM) and compared to ACWI and the S&P 500.

There is logic to the results. The S&P 500 has done far better than ACWI and he has less foreign than ACWI so both versions of his portfolio land between the S&P 500 and ACWI. You can see the market correlation to the far right of the graph in the table. There's no differentiation. I can't see where adding all those funds is additive in any way. 

I reran his portfolio with MTUM against his weightings for domestic and foreign, just one fund each as labeled. His portfolio with MTUM has a higher CAGR by 40 basis points and the standard deviation is a hair lower. On a $1 million portfolio, the 40 basis points would work out to $4000/yr.

How much more time would managing a 13 portfolio require versus a two fund portfolio and would that extra time be worth $4000/yr? 

I'm not arguing for a two fund portfolio of VTI and ACWX and while it is possible this guy is "having a conversation I cannot hear" (my favorite line from the show Deadwood), the diversification serves no purpose. Please let me know what you think. 

And a quick hit on the Defiance Daily Target 1.75X Long Microstrategy ETF (MSTX). On a daily basis, it should go up 1.75X whatever Microstrategy common stock goes up or go down 1.75X whatever the stock goes down.

MSTX started trading today. Both started out going up then there was a sharp reversal starting at 10:40 am EDT. They both traded mostly in line with each other until around 1:50 pm EDT when MSTX dropped much sharper than MSTR. At 2:05 pm MSTR was up 2.31% while MSTX was only up 1.06% when you'd expect MSTX to be up 4.04%. Even if it doesn't dial in to the last basis point, that is a real break from where a holder might expect MSTX to be. You can see that MSTR closed regular trading up while MSTX was down. 

Saying MSTX broke is too strong. The big reversal arguably ruined the effect for the day but the fund will reset and have a clean slate tomorrow. I would also note there was an after hours print that if real, sometimes there are misprints after hours, partially corrected the close but only partially. 

I've never seen an intraday whipsaw do this to a levered fund in this manner. I'm guessing it has happened before, I just haven't seen such a big one day break. Wild first day for this thing. 

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