The WSJ recently profiled Colorado Springs financial adviser Allan Roth to get his view on how to construct a diversified, tax efficient and low cost portfolio with exchange traded funds.
The ETFs in Mr. Roth’s streamlined portfolio include:
Vanguard Total Stock Market ETF (VTI)
Vanguard FTSE All-World ex-US ETF (VEU)
Vanguard Total Bond Market ETF (BND)
iShares Barclays TIPS Bond Fund (TIP)
Eleanor Laise and Jason Zweig sum up the new rules for ETF investors after reflecting on the May 6 flash crash which saw some exchange traded funds temporarily trade close to zero.
The advice is mostly common sense – know your risk tolerance, don’t use stop loss orders and check the bid-ask spread.
However, several of the rules conclude with “consider mutual funds”. Unfortunately, that’s just bad advice. Mutual funds are costly, mysterious and, overall, not investor friendly.
Just one example, there is no bid-ask spread for a mutual fund because the manager sets the price at which you buy or sell. You have no say in the matter.
Some of the ETFs that had trades cancelled as a result of the May 6 flash crash include:
Vanguard Total Stock Market (VTI)
iShares Russell 1000 Growth Index (IWF)
iShares Russell 1000 Value Index (IWD)
iShares Russell Midcap Index (IWP)
iShares S&P 500 Growth Index (IVW)
iShares Russell 2000 Value Index (IWN)
How to vaporize 10% of your net worth overnight? Use a standing stop loss order.
That was the experience of investor Gary Pinder according to reporters Mary Pilon, Karen Blumenthal and Jason Zweig.
Mr. Pinder set a stop loss order that was 20% below the latest high price on his position in the Vanguard Total Stock Market ETF (VTI). During the flash crash on May 6, VTI fell sharply and Mr. Pinder’s stop loss was executed well below his order price.
According to the reporters, insult was added to injury when VTI’s price rebounded to well above the level of Mr. Pinder’s original stop loss order.
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)
Investment adviser Steven Goldberg provides his picks for the top exchange traded funds for 2010 on Kiplinger.com.
Goldberg belives that the market will reward shares of the biggest and strongest companies this year and, within that category, the faster growers among them.
Goldberg’s ETF portfolio for 2010 includes:
55% Vanguard Total Stock Market ETF (VTI)
10% Vanguard Mega Cap 300 Growth ETF (MGK)
20% Vanguard Europe Pacific ETF (VEA)
10% Vanguard Emerging Markets Stock ETF (VWO)
5% Vanguard REIT Index ETF (VNQ)
For more diversification, Goldberg recommends adding bonds with funds such as:
SPDR Barclays Aggregate Bond (LAG)
iShares S&P National AMT-Free Municipal Bond (MUB)
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).
A Money Magazine reader recently posed the question – ” I don’t understand why ETFs are better than mutual funds.”
In the article The best (and cheapest) funds around, Money’s undercover financial planner compares and contrasts index mutual funds and ETFs. The Vanguard Total Stock Market ETF (VTI) is matched up against Vanguard’s comparable mutual fund to illustrate the differences.
In highlighting the differences between mutual funds and ETFs, the mysterious financial planner gets most points right.
However, they miss some important negatives aspects of mutual funds including tax inefficiency, the secret nature of mutual fund holdings and the fact that investors are forced to trade with the mutual fund management company at a price that is only revealed after the fact.
New York Times reporter Tara Siegel Bernard provides a primer on ETFs in her article Exchange-Traded Funds: What You Need to Know.
Bernard points out that many people like exchange-traded funds, or E.T.F.’s, for the same reasons they like index funds: they provide easy access to broad spheres of the market, while keeping costs and taxes low.
She recommends the Vanguard Total Stock Market ETF (VTI) and the Total Bond Market ETF (BND) as a prudent way to wade into investing waters with ETFs.
She also points out that investing in any fund with less than $50 million in assets is not advisable.
Money Magazine’s recent series of tips to make “lemons into lemonade” includes some suggestions for swapping positions to take tax write-offs while maintaining market exposure.
Tip 3 is to “Harvest some tax write-offs”. The tip is based on a move called a tax swap where you sell a losing fund and reinvest the proceeds in a similar one. The tax swap generates tax savings while keeping you invested pretty much as you were so you’re ready for a rebound.
As an example, Money suggests trading a U.S. large-cap fund like the Vanguard 500 or the iShares SPDR S&P 500 (SPY) for the Vanguard Total Stock Market Index (VTI).
