🎓David Swensen's ETF Portfolio: The Yale Model for Everyday Investors

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Welcome to another edition of ETF UNO's Legendary Portfolio Series, where we break down the investment strategies of Wall Street's greatest minds and show you how to apply them using simple ETF portfolios!

From 1985 until his passing in 2021, David Swensen served as the chief investment officer for Yale University's endowment. During his time as CIO, he transformed a $1 billion portfolio into a $31 billion powerhouse, achieving annual returns of 13.1% over his 36-year tenure—a track record that would make most investors envious.

The best part is that while Swensen managed billions, he believed that everyday investors could also achieve excellent results with a simple, well-constructed portfolio. No need for fancy hedge funds or private equity—just a handful of low-cost ETFs will do the trick!

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The Yale Model: Swensen's Investment Philosophy📜

What made Swensen's approach so revolutionary? Let's break down his key investment principles:

• Diversification is king: Swensen believed in spreading investments across multiple uncorrelated asset classes to reduce risk without sacrificing returns.

• Equities drive long-term growth: Despite his sophisticated approach, Swensen maintained that stocks should form the foundation of most portfolios.

• Think globally: Well before international investing became mainstream, Swensen advocated significant exposure to international and emerging markets.

• Focus on the long game: Swensen invested with decades-long horizons, ignoring short-term market noise.

• Real assets provide inflation protection: He recognised the importance of owning assets like real estate to hedge against inflation.

• Keep costs low: Swensen was a vocal critic of high investment fees, which he called "a noxious drag" on returns.

• Rebalance regularly: He emphasised the discipline of returning to target allocations, essentially forcing investors to "buy low and sell high."

The Swensen-Inspired ETF Portfolio📊

The beauty of Swensen's approach is that it can be implemented using just a handful of low-cost ETFs. Let's look at the building blocks of a Swensen-inspired portfolio that any investor can create:

1. Vanguard Total Stock Market ETF (VTI)

VTI $VTI ( ▲ 1.7% ) provides broad exposure to the entire U.S. stock market with rock-bottom fees, embodying Swensen's belief that domestic equities should form the cornerstone of any growth-oriented portfolio.

Swensen typically recommended allocating around 30% of a portfolio to domestic equities. This substantial position recognises America's economic strength while leaving room for other asset classes.

2. Vanguard FTSE Developed Markets ETF (VEA)

VEA $VEA ( ▲ 0.29% ) delivers international diversification through developed market exposure, reflecting Swensen's conviction that limiting investments to U.S. borders leaves money on the table.

Swensen believed international stocks should comprise about 15-20% of a portfolio, making VEA a crucial component of his approach.

3. Vanguard FTSE Emerging Markets ETF (VWO)

VWO $VWO ( ▲ 0.98% )  captures the growth potential of emerging economies like China, India, and Brazil, aligning with Swensen's forward-thinking approach to seeking return opportunities beyond traditional markets.

Swensen typically recommended a 5-10% allocation to emerging markets, making VWO a smaller but strategically important puzzle piece.

4. Vanguard Real Estate ETF (VNQ)

VNQ $VNQ ( ▲ 0.19% ) provides exposure to real estate investment trusts (REITs), satisfying Swensen's desire for inflation protection and income generation through tangible assets.

Real estate played a significant role in Yale's endowment, and Swensen suggested that everyday investors allocate about 15-20% of their portfolios to this asset class.

5. iShares 7-10 Year Treasury Bond ETF (IEF)

$IEF ( ▲ 0.11% ) offers exposure to intermediate-term U.S. government bonds, providing portfolio stability, income, and a counterbalance to equity risk – a key component of Swensen's risk management approach.

Unlike many bond fund managers who reach for yield through corporate or high-yield bonds, Swensen preferred the safety of Treasury bonds. High-quality government bonds often rally during market turmoil as investors seek safety, providing a cushion when stocks tumble. A 15% allocation to this type of bond exposure creates a meaningful stabiliser for the portfolio.

6. Schwab U.S. TIPS ETF (SCHP)

$SCHP ( ▲ 0.34% )  invests in Treasury Inflation-Protected Securities, addressing Swensen's concern that inflation will erode purchasing power over the long term.

TIPS are unique because their principal value adjusts with inflation, providing a direct hedge against rising prices. With an ultra-low 0.05% expense ratio, SCHP is among the cheapest inflation-protected bond ETFs available.

Swensen suggested allocating about 15% of a portfolio to inflation-protected securities, viewing them as an essential component of any long-term investment strategy.

💰Implementing Your Swensen Portfolio

Implementing a Swensen portfolio is remarkably simple:

• Low Costs: All ETFs have expense ratios ≤ 0.15%, which is critical for compounding returns.

• Diversification: Spreads risk across geographies, sectors, and asset classes.

• Passive Management: Avoids active management fees, aligning with Swensen's advocacy for index investing.

• Rebalancing: Maintain target allocations annually to stay disciplined.

That's it! There is no need for complex trading strategies or constant portfolio monitoring. The beauty of Swensen's approach is to succeed with minimal intervention.

We hope you've enjoyed exploring David Swensen's investment wisdom this weekend. While the Yale endowment had access to exotic investments unavailable to most of us, Swensen's core principles are democratically accessible through low-cost ETFs.

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DISCLAIMER: This article is for informational purposes only and does not constitute investment advice. Always conduct your own research and consider consulting with a financial advisor before making investment decisions.