One Ticker To Rebalance Them All

Someone recently asked me why I don’t just launch the TILS ETF, based on the Model Portfolio, innit? There are plenty of white-label providers out there. Okay, maybe not plenty. But there are enough of them, even in Europe.

If I were the “son of” someone, I probably would have done it already. Stick 50 million of your own money in, call it a break-even business, and let the newspapers write puff pieces about your brilliance and bravery as a young entrepreneur. But I’m not a son of — not that kind, anyway — so I have to actually think about whether this is a good business idea. And the first question worth asking is: why has almost no one done this already? I’m clearly not the first person to think of it, so it’s worth digging into why it hasn’t happened.

Two Families of Asset Allocation ETFs

There are basically two camps here.

Target risk funds hold static weights designed to maintain a consistent risk level: think Permanent Portfolio-style allocation.

Target date funds are dynamic. They shift the allocation over time, gradually de-risking to help savers avoid sequence-of-return risk on the way to retirement.

Target date funds have done reasonably well in the U.S., mostly because they’re the default option in a lot of workplace retirement plans. I’ve written before about why they’re a fine choice but not a great one. In a world where inflation runs hotter than we’re used to, drifting your portfolio heavily into bonds can produce some ugly surprises, especially if you’re inconsiderate enough to keep living for a decade or two after you retire.

Target risk ETFs, on the other hand, remain a niche product at best. iShares runs a suite of them in the U.S. (AOR, AOA, AOM, AOK), and Europe has a few comparable options. Earlier this year, Xtrackers rolled out versions that added gold to the mix. Calling the launch “quiet” would be generous, even with a handful of finfluencers covering it, just happy to finally have something that felt like “innovation” to talk about for the Europoor crowd.

The Funny Part

Xtrackers already runs an actively managed allocation ETF, the Xtrackers Portfolio UCITS ETF 1C, which blends stocks and bonds and charges 70 basis points. It launched in 2008 and now holds €760 million. Three-quarters of a billion euros sitting in an expensive product that has, at various points, merely matched a plain Vanguard 60/40 fund.

Meanwhile, the Xtrackers Diversified Portfolio 80% Equity UCITS ETF (80% stocks, the rest split between bonds and gold), charging just 24 basis points including underlying fund fees, has all of €5 million in assets.

Cheaper, more diversified, and virtually nobody owns it.

Why Bogleheads Stick With DIY Three-Fund Portfolios

If you ask experienced retail investors, the Boglehead crowd, why they still build their own three-fund portfolios instead of just buying a target risk ETF, you generally get two answers.

“I lose control over withdrawals.” The idea is that with separate funds, you can pull from whichever one has done well lately — stocks if they’re up, bonds if they’re down — flexibility you supposedly lose with an all-in-one fund that’s always rebalanced to a fixed ratio.

This is one of the more persistent myths in personal finance. Knowing in the moment when an asset has “done well” is essentially impossible: if you could reliably know that, you wouldn’t be dabbling in withdrawal/rebalancing timing, you’d be levering up and taking Mr. Market for everything he’s got. You can’t do it, sucker. Your allocation should change when your goals or risk tolerance change, not because you think you’ve spotted “something mispriced”. And those don’t change nearly as often as people think.

“I’m paying for packaging.” A wealthmanagement.com breakdown of AOA’s holdings found its 30 basis point expense ratio was roughly 8 basis points higher than what it would cost to buy the identical underlying ETFs yourself at 22 basis points. Similar gap for AOR, AOM, and AOK.

That’s a fair point on its face. But the single-ticker structure has its own savings that tend to get ignored: because everything sits inside one fund, the manager can rebalance without triggering capital gains for the investor. I ran the (very back-of-the-envelope) numbers, and an Italian investor holding a Golden Butterfly portfolio would save roughly 50 basis points a year through this tax deferral alone, assuming annual rebalancing. Put differently, as long as the ETF’s total cost stays under 50 basis points, the investor comes out ahead.

That math holds up best for larger portfolios. If you’re still in the accumulation phase and your portfolio is small relative to your ongoing contributions, you can rebalance with new cash flows instead and dodge the capital gains question entirely.

So Why Don’t These ETFs Exist?

I can think of two real reasons.

First, Bogleheads, I’ll keep calling DIY retail investors that, generally want the freedom to build things their own way. Maybe a Golden Butterfly with a bit less gold, a bit more of whatever factor tilt they’re into this year. I get the instinct. I like building my own portfolios too. But the rebalancing tax savings are real, and they deserve more weight against the lost flexibility than they usually get.

Second, most financial advisors won’t touch these products for their clients, out of fear that clients will start to wonder what exactly they’re paying the advisor for. I’ve written at length about how an advisor’s job goes well beyond picking a portfolio: that’s the whole reason model portfolios exist, and it’s why some U.S. advisors have gone ahead and launched their own ETFs. Doing it that way actually makes their job easier: rebalance once at the fund level instead of re-jigging every client account individually. But if you’re an advisor without your own ETF, you’re more likely to see someone else’s version as competition than as a tool that would make life easier for you and better for your clients.

There’s a Real Market Here

Think about your siblings. A Golden Butterfly-style portfolio might suit them perfectly: solid real returns, low volatility, shallow drawdowns. The problem isn’t the strategy. It’s explaining to them why they need to buy five different products and then, the hard part, getting them to actually rebalance. Meaning sell whatever’s done well to buy whatever’s lagged. Good luck with that.

A single product solves all of it, and does something extra: it turns the “one line item” bias into an asset instead of a liability. Show someone a line that goes up, and they’re in. No need to explain why 20% of their money is sitting in gold, or wade through “what’s a small cap, and a value stock…aren’t all stocks value stocks?!” It’s financial Tai Chi: their weaknesses become the strength. Line goes up, they’re happy. Set a standing order to add to it every month, and all they ever have to look at is the account balance climbing. You could even layer in something like trend following later without ever explaining the mechanics.

The only problem left: financial products are sold, not bought.

The Actual Hard Part

Where do you find the first 100 million? What’s the marketing plan on a shoestring budget? You need to keep costs low enough that the product isn’t dead on arrival. And that’s before you even get into regulation: try writing a marketing copy that accurately explains a tax benefit in terms general enough while, right next door, someone else is handing investors back their own principal and calling it a “dividend.” (Looking at you, covered call ETFs.) Try selling any of this across Europe, where every country runs its own tax rules…so much for the Single Market.

The best shot at making this work is a handful of advisors who’ve built solid AUM without ever promising clients they can call the next macro shift or rotate sectors on cue.

Is NTSG pulling in $80 million in under two years in Europe a success story? I’d argue it’s about the best benchmark you could ask for. WisdomTree spent essentially nothing marketing the strategy there. Every dollar that came in, came in because the strategy itself was worth buying.

Everyone Loves a Story

To borrow again from the Return Stacking crew, or maybe the Cockroach Portfolio, the trick is not just having a sensible portfolio. It’s having a story people can actually remember. At this point, I should probably just program my keyboard so F4 automatically sends people the Cockroach Portfolio white paper every time someone asks: “Why shouldn’t I put 100% of my money in stocks?”

There’s nothing especially novel about this. I still remember reading Not Boring and being reminded that great storytelling sells. That gives me some hope here.

The funny thing is that the most commercially successful target-risk portfolio of all time, the 60/40, became popular without much of a story at all. No one really knows the exact origin story of the 60/40 portfolio. It just sort of became the default. Unfortunately, “maybe the risk-adjusted returns will speak for themselves” is not a marketing strategy.

“Sit there, rebalance, and let compounding do its thing” might be good investment advice, but it’s not exactly the kind of message that gets investors fired up. That’s the challenge for all-weather-style portfolios. They’re designed to smooth out the full cycle. But that also means they can look boring, or even broken, during raging bull markets. Especially when single-country ETFs, thematic funds, and whatever else is working at the moment are grabbing all the attention and marketing dollars. These portfolios tend to prove their worth in drawdowns. The problem is that drawdowns are usually the exact moment when no one is excited about shopping for new funds.

The issue is even harder because many thematic ETFs are expensive. Higher fees mean bigger marketing budgets. And it’s tough to make your voice heard when the other side can shout louder, tell a simpler story, and point to a hot, if short-lived, performance chart.

The good news is that the disappointment around robo-advisors could create a bigger opening for these ETFs. They’re targeting a similar audience but may have a better distribution model. You don’t need to open an account on a new platform to buy an ETF. In theory, you can buy it through any broker. In practice, of course, distribution is never quite as clean as the pitch deck says it is.

The Final Boss

The ideal fund would probably be one that targets a stable return of inflation plus 5%. Roger Nusbaum has a good breakdown of this idea. Even if he doesn’t frame it this way explicitly, he lays out many of the pros and cons of using a target-risk ETF versus building the portfolio yourself.

Of course, Roger is looking at the problem from an advisor’s perspective. Here, I’m arguing more from the opposite side: the perspective of the investor who doesn’t want, or isn’t able, to build the whole thing on their own (and doesn’t have a proper advisor). The biggest issue with putting everything into a single ETF is that it can quickly become a black box. This is especially true once the strategy starts adding different alternative sleeves or more complex return streams. From the outside, it can become almost impossible to know what is working, what is not working, and why.

That problem is solvable, but only with transparency.

Managers need to provide detailed, regular reporting on what is happening inside the box. The quarterly reports from Return Stacked are a great example of how to do this well. On the other side, what UBS does with UEQC or what WisdomTree does with CRRY are closer to examples of what not to do.

Roger’s main advantage for the DIY approach is flexibility. You can design the portfolio exactly the way you want. That’s a real benefit for advisors and sophisticated investors. But it’s not much of a benefit for your sibling who can barely explain the difference between a stock and a bond. For that investor, the choice is not really “single ETF versus perfectly customized DIY portfolio.” The choice is more likely “single ETF versus paying an advisor to build and manage it for me (with the added issue of finding the right advisor).”

There’s probably enough room for both models to work. Some investors will want the simplicity of a one-ticket ETF. Others will want an advisor to customize the portfolio. And there’s a hybrid model too: the advisor who builds their own ETF and uses it as the core solution for clients.

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