Long-time readers of ITA are aware of ITA Index, our customized benchmark. Why use a benchmark such as the ITA Index? While we watch the performance of VTSMX, an index fund that covers the entire U.S. Equities market, it is not an appropriate benchmark if one holds assets outside the U.S. Equities market. Emerging markets is an example. For this reason, I came up with a way to measure the performance of a portfolio that holds a variety of asset classes.
To use the ITA Index one must first lay out a Strategic Asset Allocation (SAA) plan. For example, suppose we hold the following asset classes and the associated percentage in each.
- U.S Equities = 30%
- Developed international markets = 15%
- Emerging markets = 5%
- Domestic REITs = 20%
- Bonds and Treasuries = 30%
The benchmark for U.S. Equities is VTSMX or VTI. Therefore, one of our holdings will be VTI in the portfolio and 30% is multiplied by the IRR for VTI or VTSMX giving us that performance percentage of the portfolio.
Since developed and emerging markets are both international, I use VGTSX as the benchmark. I could split these asset classes, but that is not necessary unless one wishes to fine tune the ITA Index. Twenty percent (20%) of the performance of VGTSX is added to the above 30% calculation. In this example we have accounted for 50% of the portfolio.
We are left with two more asset classes in this example. For a REIT benchmark I use VNQ. To calculate this portion of the ITA Index I multiply 20% times the IRR performance of VNQ and then add it to the above 50% calculation.
For the last asset class, bonds and treasuries, I use Vanguard’s Total Bond ETF, BND. Thirty percent (30%) of the IRR value of BND completes the asset calculations. I add this product to the above 70% to complete the ITA Index calculation.
All this is build into the TLH Spreadsheet, although each user will need to customize the calculations to meet the SAA portfolio plan as each portfolio is different.
If you have specific questions related to calculating the ITA Index, please ask.