Larry Swedroe Portfolio Review and ETF Pie for M1 Finance

The Larry Swedroe Portfolio – or simply the Larry Portfolio – as the name suggests, was created by the legendary evidence-based investor Larry Swedroe. Here we’ll take a look at its components, performance, and the best ETF’s to use in its execution.

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What Is the Larry Swedroe Portfolio?

The Larry Swedroe Portfolio, also simply called the Larry Portfolio, comes from (you guessed it) legendary investor Larry Swedroe.

The Larry Portfolio was designed to capture more risk-free return (alpha) by enhancing factor exposure to the known equity factors that explain stock market returns outside of market beta (from Fama and French), in this case particularly the Size and Value factors. Specifically, small stocks tend to have higher returns than large stocks, and Value stocks, usually somewhat-boring stocks that are believed to be underpriced, which tend to have higher returns than their Growth counterparts.

The Larry Portfolio attempts to capture the return of the stock market at a lower volatility and risk by tilting the portfolio toward Small Cap Value, a move that many seasoned investors seem to be making nowadays. This tilt allows for a smaller allocation to stocks and a higher allocation to intermediate treasury bonds which are considered “safer” and less volatile than stocks. The Larry Portfolio also diversifies internationally by incorporating Emerging Markets Value, another move that I like.

The Larry Swedroe Portfolio looks like this:

• 15% Small Cap Value
• 7.5% Developed Markets Small Cap Value
• 7.5% Emerging Markets Value
• 70% Intermediate Treasury Bonds

Who Is Larry Swedroe?

Larry Swedroe is the director of research for Buckingham and the BAM Alliance. Swedroe is a prolific writer and contributor in the investing world. You’ll see him making forum posts on the Bogleheads Forum as well as writing syndicated articles around the web for sites like ETF.com, Yahoo Finance, and Forbes. If you’ve read my take on dividends, you’ll know I’m a big fan. He takes a scientific, evidence-based, data-driven approach to investing, not unlike Paul Merriman; I usually try to do the same.

Swedroe originally presented the Larry Portfolio in a book with Kevin Grogan in 2014 titled Reducing the Risk of Black Swans. They released a new, updated edition of the book in 2018 that you can get on Amazon here. I would also highly recommend his book The Only Guide to a Winning Investment Strategy You’ll Ever Need. If you’re interested specifically in learning about factor investing, he also has a book titled Your Complete Guide to Factor-Based Investing.

Larry Swedroe Portfolio Performance Backtest

Unfortunately we don’t have much historical data since Emerging Markets Value is a relatively new, very narrow asset class. ETF choices for it are few. Going back to 2011, here’s the Larry Portfolio’s performance vs. a traditional 70/30 and an S&P 500 index fund:

Looks pretty dismal, right? Let’s talk about why.

First, international stocks in general have underperformed the US in recent years. Keep in mind half of the equities slice in the Larry Portfolio is using ex-US stocks. We also shouldn’t expect stellar returns, as this is a bond-heavy portfolio from the beginning.

Secondly, the past decade also hasn’t been great for the Size and Value factors. I would argue this shouldn’t deter you from believing in them long-term. Small-caps have still crushed large-caps historically, and Value has beaten Growth historically. Moreover, we would expect negative factor premiums from time to time, even for extended time periods like the last decade. But interestingly, there have been more 10 year periods where the U.S. market delivered a negative premium than there have been 10 year periods where U.S. Value delivered a negative premium.

As a rule, I don’t employ market timing, but AQR submits that Value is basically the cheapest it’s ever been right now, suggesting that now may be the worst time to give up on the factor, and that it’s due for a comeback.. Giving up on a portfolio simply because it underperforms its benchmark is known as tracking error regret; don’t succumb to it.

Factors are simply unique or independent sources of risk. A typical 60/40 portfolio has more risk than one might realize at first glance. Due to the comparatively greater volatility of stocks compared to bonds, over 80% of the portfolio’s risk is market beta. Conveniently, diversifying across factors actually leads to a “stronger” portfolio in terms of reducing the risk of black swan events, but you must be able to live with tracking error regret, a term for giving up on a strategy after its underperforming its benchmark for some period of time. Adding in factors necessarily means your portfolio’s performance does not resemble the market; there may be periods of underperformance.

I personally still very much believe in the Size and Value factors; like the Larry Portfolio, my portfolio tilts Small Cap Value.

Larry Swedroe Portfolio ETF Pie for M1 Finance

M1 Finance is a great choice of broker to implement the Larry Portfolio because it makes regular rebalancing seamless and easy, has zero transaction fees, and incorporates dynamic rebalancing for new deposits. I wrote a comprehensive review of M1 Finance here.

As I mentioned, there aren’t many great choices for an Emerging Markets Value ETF. I went with SPDR’s S&P Emerging Markets Dividend Fund (EDIV) due to its comparatively lower expense ratio for the class, its volume, and SPDR’s solid track record. Other options include the FlexShares Emerging Markets Factor Tilt (TLTE), WisdomTree’s Emerging Markets High Dividend Fund (DEM), and the AAM S&P Emerging Markets High Dividend Value ETF (EEMD). Comparing these is beyond the scope of this article.

Utilizing EDIV, DLS, and 2 Vanguard ETF’s, we can construct the Larry Portfolio pie like this:

• VBR – 15%
• DLS – 8%
• EDIV – 7%
• VGIT – 70%

Since M1 Finance doesn’t allow fractions of 1%, I made DLS 8% and EDIV 7%.

You can add the Larry Portfolio pie to your portfolio on M1 Finance by clicking this link and then clicking “Save to my account.”

Disclosures: I am long VBR.

Interested in more Lazy Portfolios? See the full list here.

Disclaimer:  While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.