Portfolio Construction

Financia Capital utilizes a “core/satellite” model to construct well-diversified, tax-efficient, low-cost portfolios.

The “core” of each account consists of one or more low-cost, well-diversified, no transaction fee index funds, such as the Fidelity Spartan 500 Index Fund Advantage Class (expense ratio: 0.07%).

The “satellites” will almost always be exchange traded funds (ETFs), exchange traded notes (ETNs), and/or holding company depositary receipts (HOLDRS), selected by Financia Capital to gain exposure to or overweight particular asset classes, countries, styles, and sectors.

A key benefit of this core/satellite strategy versus an all-ETF approach is the efficient reinvestment of dividend income and small additions made to the account by the client. While ETFs and other exchange-traded fund-like securities offer several advantages not shared by traditional index funds (such as better tax efficiency, often-lower expense ratios, superior trading flexibility, and no minimum investment), a critical disadvantage of ETFs is the inability to reinvest dividends and other small cash amounts without incurring brokerage commissions. For example, at a typical commission rate of $18 per trade, the cost of investing $1000 in an ETF represents a nearly 2% reduction in value right out of the gate. It can therefore be very expensive over time to reinvest small amounts of cash in ETFs, but leaving the cash just sitting in the account can create a drag on performance over time. The solution is the core no transaction fee index fund, which allows us to move this cash into equities immediately at no additional cost to the investor.

The specific percentage of account capital allocated to the core index fund(s) and satellite ETFs will vary depending on our current equity market outlook and country, style, and sector analysis. In the early stages of a bull market, for example, we will typically overweight small-cap growth stocks using an ETF such as the iShares Russell 2000 Growth Index Fund (symbol: IWO), whereas in the latter stages of a bull market, we are likely to increase the average market cap of out portfolio to get it above that of the overall stock market by using an ETF like the Rydex Russell Top 50 (symbol: XLG).

In our balanced accounts, designed for conservative investors who are approaching retirement or are living off of investment income, we will add fixed-income satellites. These may include bond index funds and ETFs, inflation protected securities, high-yielding money markets and CDs, and municipal bonds – all “laddered” to be consistent with our inflation and interest rate outlook.

Contact us today to set up a free review of your current portfolio holdings and to discuss how we can work with you to reach your investment objectives.