Deconstructing The S&P 500 By Sectors And The Index's Changing Risks

Craig Israelsen
09/24/20 4 PM EST
Program Id: 769667795
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Advisor Questions Answered

1. (Jeff Aron) Is there rebalancing being done annually to 1/11th of total portfolio value in the granule example?  If so, why are the ending balances so difference among the sectors?
Yes, the results are based on the portfolio being rebalanced at the end of each year in the equally-weighted sector portfolio.  The ending balances are widely different because of the performance differentials among the 11 sectors over the 15+ year period.


2. (John Crosby) In a down year i.e 2008 - what happens if we hold off on the withdrawal for that year?
If definitely helps.  In the case of the equally-weighted 11-sector portfolio the ending balance in year 16 increases to $582,179 (from $535,900 IF a withdrawal occurred in 2008).  In VOO, the ending balance was $556,592 without a withdrawal in 2008 (vs $497,465 with a 2008 withdrawal of $12,000).


3. (Andrew Fama) Slide 29, curious to see what would the Custom weighted balance be at the end of the 16 years? You illustrated VOO and Equally Weighted, but not Custom Weighted.
The equal-weighted ending balance was $535,900 after 16 annual withdrawals of $12,000 from the best performing ETF.

If using the custom weights (heavy weights to Info Tech and Health Care) the ending balance was $713,803.  But, on three occasions Info Tech had to help out another sector that didn’t have enough money remaining to cover the full $12,000 withdrawal.


4. (Hays Glover) Did you inflate the $12,000 annual withdrawals?
They were not inflated, but remained at $12,000 each year.  In actual practice some clients may want an inflated withdrawal each year, while others may not.


5. (Hays Glover) What if you withdrew $12,000 and rebalanced, instead of withdrawing from the single best performer?

The ending balance was $514,449 vs. $535,900 if withdrawing the full $12,00 each year ONLY from the best performing ETF.


6. (Dan Joss) It would be insightful to see the foreign companies in these sectors where politics regarding healthcare and other sectors are decidedly different.
Interesting idea, I don’t have access to that type of info.


7. (Dan Joss) If you took $12k each year from the worst performer in the equal weighted portfolio, wouldn't you come out even better?  
The ending balance under that approach was $433,104, but Info Tech had to help out other sectors 5 times because the other sectors did not have a large enough balance to cover the withdrawal.  Pulling from the best sector each year produced an ending balance of $535,900.

Interesting you took $12k from the most recent best performer (the one with momentum) and not the largest balance. If you took from the largest balance each year, you would have better controlled your risk.

Withdrawing $12,000 from the ETF with the largest balance each year produced an ending account balance of $524,809 vs. $535,900 if withdrawing the $12,000 from the best performing ETF each year.


8. (Mike Miller) What TEF are you using for US Ecommerce return in your new economy model?
That information is in the $75 New Economy report.


9. (Liz Richardson) The mkt seems to be doing well even during Covid. Concerned for a severe downturn with Political climate, Covid, unemployment. Thoughts?
The strength of the U.S. equity market is often measured by the S&P 500.  Unfortunately 2/3 of the companies in the S&P 500 are down YTD over 20%.  The Russell 2000 is down about 8.5% right now.  The largest tech companies in the S&P 500 are skewing the performance in such a way that it appears that U.S. equities are doing well—and the reality is that most companies are not doing well.


10. (Laura Scharr) These custom weights of 25, 25, 5. 10, 5, 5, 5, 5, 5,,,,,  seem extremely arbitrary. Not sure what Craig is getting to. This is art versus science. You an only do this weighting if you know in retrospect who the winners are.
The custom weights are not all that arbitrary based on the historical allocations back to 2009 (as shown below).

At a moment in financial history when performance of major U.S. stock indexes is heavily weighted by FAANGM, the objective of this class is to give practitioners a better understanding of industry sector performance and hidden risks to diversified portfolios.

Class Description
At this class, the risk, return and statistical characteristics of the S&P 500 over the past 16 years are compared to the index's 11 component industry sectors.

In deconstructing the broad market into its component sectors, you'll also learn how to build portfolios for your clients using 11 low-expense sector ETFs, enabling:
• better performance than the typical S&P 500 index
• a "modular" S&P 500 that allows withdrawals from the best-performing sectors to manage risk
• portfolios tailored to the needs and preferences of your clients

Craig Israelsen, Ph.D., teaches A4A members monthly about low-expense investing. For three decades, Craig has helped define best practices for managing portfolios for individuals, publishing his research monthly in Financial Planning magazine. He's taught on A4A for nearly a decade. Craig's taught family financial management at universities for over two decades, and he's currently Executive-in-Residence in the Financial Planning Program at Utah Valley University.

This webinar is eligible for one hour of CE credit towards the CIMA® and CPWA® certifications, CFP® CE, PACE credit toward the CLU® and ChFC® designations and live CPA CPE credit.

If you're paying a TAMP or custodian to manage portfolios, Craig's monthly A4A classes will show you how to lower your fees and build a practice that's better for your clients and you.

After registering, you will receive an email confirmation from This email address is being protected from spambots. You need JavaScript enabled to view it.Check spam and junk folder if you do not receive it.



More than 50 hours of CFP® CE credit and more than 100 hours of Investments & Wealth Institute® credit on replays available 24/7 to paying members ($120 annually) of CPAs are eligible to receive CPE for attending live webinars only. To learn how to receive continuing professional education credit viewing webinar replays, please see our detailed instructions.

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Always a pleasure, Craig.

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I like the New Economy Portfolio

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