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A New Benchmark for Advisors

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The introduction of lifecycle index funds into the ETF marketplace creates a new tool for advisors but also a new hurdle. With many advisors using an asset allocation strategy, the S&P 500 is no longer a great benchmark against which to set your pace. Using the S&P 500 is still valuable for many purposes, to be sure. We still chart our portfolios’ performance against it since we are very familiar with its past performance and its other characteristics, and since many of us have a great feel for what it represents.

For instance, the S&P 500 has been and will continue to be a perfect benchmark for those who pick stocks from within the U.S., even the small- and mid-cap universes. I would even argue that the S&P 500 is still a good benchmark for a manager choosing when to move to bonds as part of a tactical allocation strategy and not part of a client’s risk aversion strategy or retirement planning. I believe this would most likely be mutual fund managers and not financial planners. Even though asset allocation is the driver for returns and risk, when picking stocks and timing markets is not based on the client but on the manager’s investing strategy, the S&P 500 is the appropriate benchmark for that manager. It is appropriate because the S&P 500 represents an easy substitute for the client and the manager when they were trying to top its performace through stock picking.

For advisors who by contrast use an asset allocation strategy, a second benchmark should be used. These advisors would include those who use mutual funds, index funds, ETFs, stocks, and bonds to provide appropriate market coverage for a client based on that individual client’s time to retirement, risk aversion, and retirement income needs.

The S&P 500 alone cannot show clients that you add value as an asset allocator. If you and your client agree that the S&P 500 does not have the risk characteristics fitting their needs, then you should not plot your returns solely against it.

Standard and Poor’s has 12 indexes, all of which have an investable ETF, that are the first of their kind: a truly passive lifecycle and risk index fund. The indexes come in two flavors, target date and target risk. For the former you can choose from target dates ranging from 2010 to 2040 and a retirement income index in five-year increments; for the latter there are the following target risk indexes: aggressive, growth, moderate, and conservative. These indexes and corresponding ETFs are formed using a surveying method of all their mutual fund category peers. The average asset allocation from each mutual fund category is assigned to the corresponding index. What makes these ETFs and indexes truly different is that the asset allocations are filled entirely with iShares ETFs that have expense ratios between 0.29% and 0.34%. The costs of the ETFs include the underlying ETFs’ expense ratios.

These new ETFs and their indexes are an easy substitute for the client of an advisor using an asset allocation strategy. The advisor can show the great success or shortcomings of their asset allocation and investing decisions by comparing their portfolios’ returns to an appropriate benchmark–indexes that are easily accessible and completely passive.

For those not ready to add a new benchmark to their portfolio performance to show clients, these new ETFs can be a great tool for developing better risk-appropriate portfolios and against which to compare portfolios’ performance, if only internally. It may turn out that more advisors use these investable ETFs for an all-in-one passive portfolio.

Kyle Waller

Wiser Wealth Management

Marietta, Georgia


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