IVY portfolio summary: fees, commissions, and taxes

Today I’d like to address some of the biggest concerns with the IVY portfolios, in particular the timing versions. Three big concerns with the implementation of IVY are management fees, trading commissions, and taxes and that they may impact performance enough to render any advantage mute. These are truly valid concerns for any portfolio. Here I’ll show how the advantages of the IVY portfolios easily overcomes these concerns.

First, lets tackle fees and commissions together. The fees we’re talking about are the management fees of the ETFs in the IVY portfolio. Commissions are what your broker will charge for trading the ETFs. While commissions are dependent on your choice of broker I’ll use my broker, TD Ameritrade as an example as they are representative of many of the discount brokers. In the tables below I compare the fees and commissions for a standard 60/40 stock bond portfolio with the basic IVY 5 ETF portfolio and the expanded IVY 13 ETF portfolio. .

A basic, not so diversified portfolio and the most commonly recommended one (60/40) would run you about 0.09% to 0.24% per year in management fees and zero in commissions as you can buy and sell these ETF or VBINX mutual fund for free. That’s the benchmark. The IVY 5 portfolio would run you 0.26% per year in fees while the IVY 13 would run you 0.21% per year (the commodity ETF fees make a big difference). For the IVY 5 that’s an extra .02% to 0.17% per year in fees plus the commissions from one of the ETFs. For the IVY 13 that’s an extra -0.03% to 0.12% per year in fees plus the commissions for trading 3 of the 13 ETFs. If you remember from my last post the IVY buy and hold 5 and IVY buy and hold 13 generate an extra 1.19% to 2.79% per year in returns over the 60/40 portfolio. The extra returns of being more diversified far outweigh the extra costs of the IVY 5 or IVY 13 buy and hold models. The IVY buy and hold 13 is actually lower cost than the IVY buy and hold 5. Even among the most ardent buy and hold types there is hardly ever any argument against broader diversification. So the most basic take away here is diversify, diversify, diversify and take advantage of some of the few truly free lunches investing – low fees, diversification, and re-balancing.

Now lets consider the timing versions of the IVY portfolios. The timing versions of the IVY portfolios generate an extra 0.5% (GTAA 13 over IVY 13 B&H) to 0.76% (GTAA 5 over IVY 5 buy and hold) per year in returns over their buy and hold counter parts. The more aggressive timing models, GTAA AGG 3 and AGG 6, do even better. The management fees are no different than the buy and hold versions. You own the same exact ETFs. The difference is that you’re trading more often. Where as with buy and hold you may trade each ETF once per year at the re-balance period, in the timing versions the trading happens whenever there is a cross of a 10 month moving average. On average the IVY 5 timing version (GTAA 5) generates 3-4 round trip trades per year while the IVY 13 timing version generates 6-8 round trip trades per year. The great thing is that these days all discount brokers offer a large list of commission free ETFs. In the table I’ve used TD Ameritrade as an example. Most of the ETFs used to implement the IVY timing models can be traded commission free. This is similar for most discount brokers. So, the extra commissions generated from the timing models are also easily overcome by the extra returns. I’ll leave the final word on fees and commissions to Mebane Faber. From the IVY summary update paper:

Commissions should be a minimal factor due to the low turnover of the models. On average, the investor would be making three to four round-trip trades per year for the portfolio and less than one round-trip trade per asset class per year. Likewise, slippage should be nearly negligible, as there are numerous mutual funds (end-of-day pricing means zero slippage) as well as liquid ETFs an investor can choose from.

Now on to the biggest consideration, taxes. This is only a consideration if an investor is implementing these portfolios in a taxable account. The IVY timing portfolios are great for tax deferred accounts. In taxable accounts we need to pay income and capital gains taxes every year (on realized gains only). This is true even for staid and boring buy and hold portfolios like the 60/40 model. The table below, from Vanguard, compares the before and after tax returns for their balanced VBINX fund.

Taxes have a considerable impact on returns of any portfolio. The buy and hold versions of IVY have no worse after tax performance than the basic 60/40 portfolio. The key question is the impact of the extra trading involved with the IVY timing portfolios. Here again I will turn to Mebane’s research paper. From page 36.

Gannon and Blum (2006) presented after-tax returns for individuals invested in the S&P 500 since 1961 in the highest tax bracket. After-tax returns to investors with 20% turnover would have fallen to 6.72% from a pre-tax return of 10.62%. They estimate that an increase in turnover from 20%-70% would have resulted in an additional haircut of less than 50 basis points to 6.27%. There is some good news for those who have to trade this model in a taxable account. The system results in a high number of short-term capital losses, and a large percentage of long-term capital gains. Figure 17 depicts the distribution for all the trades for the five asset classes since 1973. This should help reduce an investor’s tax burden.

My personal experience tracking the IVY timing portfolios concurs with what the research says. The systems generate small short term capital losses and long term capital gains which helps with the tax burden. Also, with some active tax management investors can help this further. The 0.5% per year in tax burden over the standard buy and hold versions is therefore a good approximation. Okay, so lets add it all up. For investors wanting to buy and hold the broader more diversified IVY 5 and IVY 13 portfolios are no-brainers. The extra returns more than make up for the extra fees and commissions and taxes are no worse than than the 60/40 portfolios. The timing versions are also no brainers in tax deferred accounts for investors who are willing to accept the once a month work required to maintaining their IVY timing portfolios. In taxable accounts it’s a much closer call. Adding up the effect extra commissions and taxes from the extra trading, eats up all the extra return of GTAA 13 over IVY B&H 13 and leaves about 0.2% a year left over for GTAA 5 over IVY B&H 5. GTAA AGG 6 and AGG 3 have such large extra returns that they more than make up for the extra costs. The fact that the aggressive versions of IVY may be better choices than the basic IVY timing models for taxable accounts was a new and surprising finding for me. Of course this comes with extra effort. So, I’ll say that If your only concern is annual return then the IVY timing models may not be the best choice for taxable accounts..

But I hope by now that your investing experience and my ramblings on this blog have shown that annual return should not be your primary concern. During the wealth building phase risk-adjusted returns and max drawdowns are much more important portfolio metrics. Higher risk adjusted returns and lower drawdowns dramatically increase your chances of sticking to your investment plan. Behavioral issues affect the majority of investors as shown over and over in the Dalbar studies. All of the IVY timing models blow away the buy and hold versions on these metrics. And during the retirement phase safe withdrawal rate (SWR) is the most important portfolio metric. Again the timing versions of IVY blow away the SWRs of the buy and hold versions as well. Below I included the table from my last post which summarized the important portfolio metrics.

I’ll conclude by saying that for real world investors with real world human emotions and biases the IVY timing portfolios give you the best chance of achieving your investment and retirement goals even after considering fees, commissions, and taxes.