All-ETF Portfolios

[This article has been reposted by Seeking Alpha with the title "Model ETF Portfolios from SmartMoney" on March 1, 2007]

SmartMoney.com recently has an article which provides some model portfolios for investors who consider taking the all-ETF approach in building their portfolios. The article, titled “Ready for an All-ETF Portfolio? Here Are Some Models,” starts by making the arguments of under what circumstances an investor is better off to stay with the traditional index mutual funds. Such circumstances include:

• In a 401(k) plan: Commissions involved in ETF trading makes it unfeasible for dollar-cost averaging;
• For buy-and-hold investors: The flexibilities ETF offers are less attractive for buy-and-hold type of investment.

But for investors who have a lump sum to invest, ETFs are very appealing for their lower fees and better tax efficiency than their mutual fund counterparts. For these investors, the article offers several model portfolios.

The Conservative Approach

In this case, you only need two ETFs, one tracks S&P 500 index and the other covers foreign markets, to give you the broad expousure of both the domestic stocks and international equities. Possible candidates for this approach include:

• State Street SPDR (SPY)
• Vanguard Total Stock Market (VTI)
• iShares MSCI EAFE ETF (EFA)

Take It Up a Notch

If you are looking for a better return, then adding some specific investment style ETFs can help you achieve just that, with added risks. If this is what you want, you may consider:

• iShares Russell 2000 Value (IWN)
• iShares S&P MidCap 400 (IJH)
• iShares S&P Small Cap 600 (IJR)
• Powershares Dividend Achievers ETF (PFM)

Risk(ier) Business

Not risky enough? Then, it’s time to consider sector ETFs which track industry groups such as energy, technology, consumer staples, utilities, financial services and health care. These ETFs could be very volatile when comparing to the broad market:

• Energy Select SPDR (XLE)
• Technology Select SPDR (XLK)
• Vanguard Emerging Markets Stock ETF (VWO)
• Rydex S&P Equal Weight (RSP)
• PowerShares FTSE RAFI U.S. 1000 (PRF)

With ETFs coming out at a record speed in 2006, more and more ETFs are tracking indexes that are not all familiar to investors and some ETFs are narrowly concentrating on specific region, country, or industry sector. In the end, as the article cautions, it’s up to the investors to determine what kind of ETFs, if at all, they want to invest in.

After all, its one thing to put some extra cash to work building an all-ETF portfolio, but it’s another to lose it all on a bad call.

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