Nov 25
Building Portfolios Using ETFs
Sorting through over 700 ETFs is a daunting task no investor wants to tackle. Despite the large number of available ETFs, it is possible to keep it simple if you have a little help narrowing down the choices. Some basic divisions to consider are the following.
Consider what ETFs will make up your core U.S. equity holdings.
Will you include international equities and do you want to separate emerging markets from the developed nations?
- Are you going to include REITs and if so, will international REITs be part of the mix?
- Will bonds be part of the portfolio?
- Should one include commodities or any precious metals?
- Do you want to participate in the movement of the U.S. Dollar?
- Will treasuries be part of the portfolio mix?
Once the basic questions are answered, then one can begin to break the vast number of ETFs into smaller and manageable groups. Here is a list of broad-based or macro ETFs.
- VTI – Vanguard Total Stock Market
- EFA – MSCI EAFE Index or Total International ETF
- VWO – Vanguard Emerging Markets
- DJP – Dow Jones Commodities Index
- VNQ – Vanguard REITs
- RWX – DJ Wilshire Int’l REITs
- USO – United States Oil
- GLD – SPDR Gold Shares
- AGG – Lehman Aggregate Bonds
- TIP – Lehman TIPS Bond
- IEF – Lehman 7-10 Year Treasuries
- UUP – Power Shares US Dollar Index Bullish
The above 12 ETFs cover a wide section of the world market. The list is not a recommendation, but an example of how one might narrow the broad array of ETFs into a manageable number of holdings.
My personal preference is to break VTI into at least six separate asset classes in order to break away from S&P 500 dominance. This can be accomplished by selecting ETFs such as VOE, VOT, VBR, and VBK. Check these out using Yahoo Finance. ETFs for oil, gold, treasuries, and the dollar are alternative investments and may not be what one wishes to hold, at least in large percentages. An alternative I did not list above is timber or the PCL ETF.
Cutting the list of 700 plus ETFs down to a manageable number is one of the features of Premium Content. There one can see how actual portfolios are constructed using core ETFs.
Lowell Herr
Photograph: Preparation for Thanksgiving
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