Why Use Four ETFs When You Could Use 17 Instead?

Invesco maintains a suite of ETF model portfolios. The holdings appear to the same for the most part, subject to asset allocation which ranges from 0% equities/100% bonds to 100% equities/0% bonds. Here is their 60/40.

You can see it is tweaked a little to make room for managed futures which is taken from the fixed income sleeve and there's a little cash. Below, we compare the Invesco 60/40 to the following;

Both are obviously much, much simpler but generally target the same asset allocation. I made one change to the Invesco 60/40, I swapped out ICLO and added client holding JAAA so we could get a longer backtest. 

They all look very similar. There are a couple of instances of differentiation for Portfolio 3, it tends to go down less than the other two probably thanks to avoiding duration. 

The result of the Invesco model is fine but as we look at various models with so many moving parts, the Invesco model has 17 funds plus the cash. There's pretty much no differentiation compared to just buying VBAIX. The point here isn't necessarily to go as simple as buying only VBAIX but if a much simpler portfolio with three, four or five holdings gets essentially the same result with essentially the same volatility and the essentially the same path, I'm not sure why anyone would choose the model with 17 funds versus four. 

If you want differentiation from VBAIX' path (I do) and think you can get it, then taking on a little more complexity is warranted, I believe this to be the case. If you don't want differentiation (perfectly valid) then this might make even less sense.

The prompt for this post was an email from Finominal that did a review of the 0/100 version of their model, so just fixed income which has most of the same fixed income holdings as the 60/40, just proportionately larger weightings. The one difference is they add a small weighting to PCY.

Has the portfolio been thoughtfully constructed?
No, as many of the funds exhibit high correlations, offering practically zero diversification benefits. For example, the iShares Core US Aggregate Bond ETF features a 0.97 correlation with the Invesco Total Return Bond ETF and also 0.97 with the Invesco Equal Weight 0-30 Year Treasury ETF. 

Sort of a scathing review but eight funds to have a 0.97 correlation to AGG? This isn't about my aversion to AGG, plenty of people are just fine with AGG-like exposure but eight funds to replicate it doesn't make sense to me. Finomial says the model can be replaced with two funds; 60% AGG/40% FLOT which is a long time client holding. 

We've done this same exercise quite a few times and differentiation doesn't seem to be a priority very often in this realm.  I asked Copilot about this a few weeks and it very cynically said, model providers aren't trying to differentiate. 

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