Building a World Portfolio using Exchange Traded Funds (ETFs)

By ETF Heat Map Team

As risk averse investors, modern portfolio theory shows us from a theoretical perspective on how to construct a portfolio of multiple assets that will maximize returns for a given level of risk. Specifically, William Sharpe, who won the Nobel prize for developing the capital asset pricing model (CAPM), reminds us that the risky assets of a portfolio is comprised of the entire world of risky assets.

Sample World Portfolio

Given a world market portfolio includes risk free assets and risky assets, we have attempted to put together a sample world portfolio for an investor. Given each investor has differing levels of knowledge, risk appetite, goals and time horizons, we have not allocated a percentage to each asset.

It essential that a well balanced public market portfolio is constructed of both fixed income, equity and alternative assets. For simplicity purposes, we have decided to classify the alternative assets under the equity component.

We have constructed the sample world portfolio using both US Bonds and International Bonds with the SPDR Aggregate Bond Fund (BNDS) and the iShares Foreign Bond ETF (IGOV), respectively. BNDS and IGOV have expense ratios of 0.08% and 0.35%, respectively. It is common for an investors’ portfolio to contain a higher proportion of fixed income as a percentage of their overall portfolio as their time horizon declines, usually to meet obligations.

The sample world equity portfolio was constructed using US equity and International equities, specifically the Guggenheim S&P 500 Equal Weight ETF (RSP) and the Vanguard FTSE All World ex-US ETF (VEU).  RSP and VEU have expense ratios of 0.40% and 0.13%, respectively. When the investors’ time horizon is long, it is usually recommended that they have a higher weighting to the equity component.

It is usually also prudent from a portfolio allocation perspective to add asset classes that will grow on an inflation adjusted basis (Real estate, Infrastructure and commodities). Specifically, we added the iShares Global infrastructure ETF (IGF), WisdomTree Global ex-US Real Estate (DRW) and iPath Bloomberg Commodity Index Total Return ETF (DJP). IGJ, DRW and DJP have expense ratios of approximately 0.72%, 0.58%, and 0.75%, respectively.



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