*ITA Index Calculation Explained*

Calculating the ITA Index, a customized benchmark, is accomplished within the TLH Spreadsheet. This blog walks readers through the process of how to calculate the ITA Index. The motivation to come up with the ITA Index was driven by the need to find an appropriate benchmark for portfolios that included more than large-cap stocks. Using the S&P 500 as a benchmark is appropriate for portfolio constructed from stocks contained within the S&P 500. While the TLH Spreadsheet includes calculations for the VFINX, VTSMX, and VGTSX index funds, none of these are appropriate for portfolios that include a wide variety of asset classes such as real estate, bonds, commodities, precious metals, etc.

**Copernicus Dashboard:** Below is the Copernicus Dashboard. I could have pulled the Dashboard from any of the fourteen portfolios for this explanation of how the ITA Index is calculated. The Asset Allocation Plan for the Copernicus is as follows.

- 25% to U.S. Equities.
- VTI – 15%
- VOE – 5%
- VBR – 5%

- 1% to Cash or SHY.
- 28% to Bonds and Income. BIV is generally my representative ETF of choice for the ITA Index calculation.
- 10% to Developed International Equities (VEA).
- 10% to Domestic Real Estate (VNQ).
- 10% to Emerging Market Equities (VWO).
- 3% to Commodities (DBC).
- 5% to International REITs (RWX).
- 5% to International Bonds (PCY).
- 3% to Precious Metals or Gold (GLD).

The first 25% are U.S. Equities so the VTSMX index fund is an excellent proxy for this calculation. Developed International Equities and Emerging Markets all fall into the international bucket so I use VGTSX as the benchmark proxy. Remember, both VTSMX and VGTSX are included as benchmarks in the TLH Spreadsheet. In cell C7 of the Copernicus TLH Spreadsheet I generate the ITA Index calculation and it is shown below.

=0.25*C5+0.01*C37+0.28*C30+0.2*C6+0.1*C25+0.03*C38+0.05*C27+0.05*C35+0.03*C39

The first 25% (0.25) is multiplied by C5 or the Internal Rate of Return (IRR) for the VTSMX index fund. All ETFs that fall into what I call the “Big Nine” asset classes are included in the U.S. Equities bucket and the VTSMX index fund is an ideal benchmark for that group of investments.

The second calculation is 1% (0.01) times C37 where C37 is the IRR value for SHY. Since I don’t have an IRR value for Cash, I use SHY as a substitute.

The third calculation is 28% (0.28) times C30 where C30 is the IRR value for BIV. For the investor who uses BND or AGG for bonds, then plug in the IRR value for the bond ETF of choice.

The fourth calculation merges all international investments, both Developed International Equities (VEA) and Emerging Markets (VWO). Twenty percent (0.20) is multiplied by cell C6 where this is the IRR value for VGTSX, the international index fund.

Fifth Calculation: Ten percent (0.10) times C25 where this cell is the IRR value for VNQ.

Sixth Calculation: Three percent (0.03) times C38 where this cell is the IRR value for DBC or commodities.

Seventh Calculation: Five percent (0.05) times C27 where this cell is the IRR value for RWX.

Eighth Calculation: Five percent (0.05) times C35 where this cell is the IRR value for PCY. Investors using BWX for International Bonds will substitute the IRR value for BWX.

Ninth Calculation: Three percent (0.03) times C39 where this cell is the IRR value for GLD.

To be as accurate as possible, it is necessary for a portfolio to always hold some shares in the above ETFs that are used in this calculation. The number of shares is not critical as were are using IRR percentage values for the ITA Index calculation.

At times I have alluded to the fact that the ITA Index is not a “perfect” benchmark. What do I mean by this? Forty-five (45%) of the Copernicus portfolio is bench-marked by VTSMX and VGTSX and both of these index funds have IRR values that account for cash flowing in and out of the portfolio. The same is not true for asset classes represented by ETFs such as RWX, VNQ, PCY, DBC, GLD, and BIV. Asset classes outside U.S. Equities and International Equities do not account for cash flow in the same was as it does for VTSMX and VGTSX. With a lot of programming work I could build this into the TLH Spreadsheet, but the additional work would not improve the ITA Index accuracy significantly.

To maintain the ITA Index, one needs to hold a few shares in these nine basic asset classes.

- U.S. Equities or the “Big Nine” asset classes. I use VTI to cover these nine asset classes.
- Cash is covered by having a few shares of SHY.
- Bonds and Income are represented by BIV or some other bond ETF.
- Developed International Equities is covered by VEA.
- I use VWO for my Emerging Market ETF.
- For domestic REITs I use VNQ.
- International REITs is represented by RWX.
- For commodities and precious metals I use DBC and GLD respectively.
- International Bonds is covered by PCY. This is not a “pure” international bond ETF.

Investors who have other asset classes such as Timber, chose an ETF that is a good proxy.

Pose any questions you have about the ITA Index calculation and I will attempt to answer them in the Comments section of this blog. For benchmark material, go to the right-hand sidebar and under Categories find Benchmarks.

Blog usage hint. If you go to Categories and look up blogs, you will find the oldest blogs come up first so you are able to read them in the order they were written. If you simply search for the word “benchmark,” you will find the most recent blog with this word in the title or text will show up first. I recommend going to Categories for benchmark information.