As the popularity of exchange traded funds continues to grow, more advisors are offering model ETF portfolios as a service.
Forbes‘ Richard Ferri takes a look at this trend in his recent article The Next Big Thing: Model ETF Portfolios. Ferri offers his own “Core Four” portfolio solution that includes an all-Vanguard line-up:
Total Stock Market ETF (VTI )
FTSE All-World ex-US ETF (VEU )
REIT ETF (VNQ)
Total Bond Market ETF (BND)
Kiplinger’s Jeffrey Kosnett has put together several model portfolios with the idea that you can pursue any goal with nothing more than exchange traded funds.
Kosnett’s equity-only portfolio is designed for investors who have a healthy tolerance for risk and are investing for long-term growth. The portfolio includes 90% equity ETFs and 10% commodity ETFs:
In the article How to Build a Portfolio Wisely and Safely, the WSJ’s Jeff Opdyke presents three approaches to building a portfolio in a time of great uncertainty.
For investors looking to protect portfolios against inflation, Opdyke recommends treasury inflation-protected securities or TIPS since their principal adjusts upward along with inflation.
Altough Opdyke mentions Vanguard’s TIPS fund, the SPDR Barclays Capital TIPS ETF (IPE) is a better deal for investors. For more on inflation investing, see the TIPS Fixed Income ETF Directory.
For optimistic investors, Opdyke suggests the Vanguard Total International Stock Index Fund. The ETF equivalent is the Vanguard FTSE All-World ex-US ETF (VEU).
In case the “Goldilocks” outlook turns out be wrong, taking out insurance in the form of cash, long-term treasurys and a commodity ETF such as the DB Commodity Index Tracking Fund (DBC) is not a bad idea.
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The severe bear market is providing investors a rare opportunity to remake their portfolios while incurring little or no capital gains taxes.
In the article It’s a Great Time for a Makeover, New York Times contributor Paul Lim relays advice from financial planners that now is the time for investors to think about overhauling their portfolios. The current bear market has wiped out gains from the past 10 years leaving many people in a position where they would have little or no taxes to pay from selling existing holdings.
In particular, advisors are recommending to diversify portfolios while lowering expenses. Foreign stocks and real estate had been relatively expensive before the markets began their slide. Now foreign stocks trade at a P/E of 10, down from 14 in 2007. Real estate investment trusts or REITs are down 40%.
Investors can lower expenses by shifting out of stocks, bonds and mutual funds and into exchange traded funds. ETFs offer instant diversification at a much lower cost than the typical actively managed mutual fund. Lim suggests looking at iShares S&P 500 (IVV) , an ETF with an expense ratio of 0.09%.
ETFs that offer exposure to REITs include the FTSE NAREIT Industrial/Office Index Fund (FIO) and Cohen & Steers Realty Majors (ICF). For more on real estate, see Investing in REITs with ETFs.
ETFs that provide broad access to foreign stocks include the MSCI EAFE Index Fund (EFA) and Vanguard FTSE All-World ex-US ETF (VEU). For a complete listing, see the International ETF Directory.
Money Magazine’s undercover financial planner recently answered the question How to Make Money in ETFs (and how not to).
The undercover planner believes that financial advisers are not big fans of ETFs and regard them as a threat. With ETFs, individual investors can create a simple, low-cost portfolio that beats the pants off professionally designed plans. Why pay advisors 1.5% to 2% a year to do something that you could manage yourself?
The Mole recommends using ETFs that own the whole market at the lowest cost and have the greatest tax efficiency such as Vanguard Total Stock Market (VTI), Vanguard FTSE All-World Ex-U.S. (VEU) and Vanguard Total Bond (BND).
US News New Money columnist Katy Marquardt makes the case for exchange traded funds for investors on a budget in her article ETFs for Beginning Investors.
Marquardt provides three examples of ETFs that she has invested in to gain international exposure for her portfolio.
The ETFs mentioned include Vanguard’s FTSE All-World ex-U.S. ETF (VEU), which specializes in developed countries such as Japan and the United Kingdom. Also mentioned are iShares MSCI EAFE Growth Index Fund (EFG), which buys large, fast-growing foreign companies and Vanguard’s Emerging Markets ETF (VWO).
For more international ETFs, see the special report on Investing in Emerging Markets with Exchange Traded Funds.
In a recent CNNMoney.com article, “Foreign ETFs to buy now”, The Mole provides investors with useful tips about investing in international funds.
It is recommended to have exposure to international stocks; it is recommended to have exposure to US stocks as well. According to The Mole, there are several reasons why not having US stock exposure is a bad idea. First, the “United States comprises roughly 42% of the world market capitalization”. If you were to not have US stocks in your portfolio, you would be leaving a huge gap in your global portfolio. Second, US stocks have lagged behind the rest of the world. If you invest if international funds now, you are performance chasing and buying high.
The Mole considers a global portfolio with a ratio of two-thirds US stocks and one-third international stocks optimal. A larger percentage of US stocks is recommended because it helps protect investors from currency risk.
The Mole recommends the Vanguard FTSE All World Ex US (VEU) and the iShares EAFE fund (EFA). Both funds have expense ratios under .40%.
