By David Kreinces
In early May, David Swensen, Yale’s legendary endowment chief, died of cancer at age 67. Swensen was famous on Wall Street for successfully diversifying Yale’s portfolio in a wide range of alternative investments, and he was also loved for his 2005 book on exchange-traded funds (ETFs). The book, “Unconventional Success,” showed Swensen’s passion for portfolio management as he gave individual investors an “Ivy League lesson” in core portfolio construction.
Back in 2005, mutual funds were the most common way to diversify a portfolio, as the ETF structure was still new for many investors. However, progressive financial advisors quickly migrated to ETFs, and Swensen’s book gave early adopters an all-star advocate for this up-and-coming fund structure.
Swensen’s recommendation included a focus on growth (70% stocks and real estate) with global diversification in addition to sticking with a small number of asset-class ETFs. Although global diversification may sound logical, many investors, including Jack Bogle, preferred to get their foreign exposure through the S&P 500. Over most of the 16 years since Swensen’s book was published, U.S. technology stocks rewarded investors for sticking with domestic exposure, yet global diversification may still outperform eventually.
Perhaps the most valuable lesson from Swensen was his selection of Treasury bonds for portfolio protection instead of yield. Swensen made a strong case for using equity exposure to drive growth and Treasury bond exposure for crash protection. Swensen selected medium-term Treasuries (IEF) and Treasury inflation-protected (TIP), although long-term Treasuries (TLT) have repeatedly delivered the most protection when stocks have crashed.
Back in 2007, our firm, ETF Portfolio Management, was founded with Swensen’s “Unconventional Core” as our leading passive solution for growth investors. In fact, by 2012, our core portfolios evolved into “InvestableBenchmarks.com,” with Swensen’s recommendation as our “eMAC” portfolio for an efficient multi-asset class solution. Still, change is constant, and we quickly realized that leveraged ETFs and cryptocurrencies are the future of investing.
After studying the extraordinary performance of the top leveraged asset class ETFs, in addition to Ray Dalio and Bridgewater’s success with their All-Weather Portfolio, we realized that we could combine these innovations. In 2016, ETF PM launched our first risk parity portfolios through two leveraged income and growth solutions.
Together, with lessons on indexing from David Swensen and Jack Bogle, we transformed the investable benchmarks into a most unconventional approach focused on balance and leverage.
In 2017, we added a technology-focused investable benchmark, Income and Technology 3x (IT 3x), and early this year, we began to add cryptocurrency in Bitcoin and Ethereum. As we track and compare the performance of the new investable benchmarks to the older solutions from prior years, we see the extraordinary potential opportunity in being unconventional.
Clearly, Swensen’s bold recommendation of an efficient six-ETF solution back in 2005 laid the foundation for our investable benchmark platform. And today, our shared passion for portfolio management continues to drive our efforts to adapt prudently to fast-changing technology trends. Regardless of which asset allocation proves to be best over the decades ahead, Swensen will always be remembered for his incredible effort to help the average investor and for his fearlessness in identifying and communicating important unconventional innovation.
Thank you, David Swensen, and may you rest in peace.
• David Kreinces is the founder of ETF Portfolio Management in Thousand and the author of “Investable Benchmarks: A Guide to ETFs, Technology and Leverage.”