There’s a certain satisfaction to looking over a well-organized portfolio–much like sitting down to a clean desk: in each case, a small number of items are present that have been carefully selected to perform a unique and important task, while all redundant and extraneous elements have been removed.
Like an uncluttered desk, well-organized portfolios can be few and far between. That needn’t be the case, however, with a large and growing number of exchange-traded funds that offer convenient, cost-effective and straightforward means of gaining exposure–not just to equities but a wide range of asset classes including bonds of varying maturity, international and emerging markets, commodities and currencies.
It would not be hard, in fact, to construct a well-organized portfolio with a collection of ETFs small enough to count on one hand. In fact, Standard & Poor’s publishes three model portfolios that do just that: One for growth-oriented investors, another for those seeking a moderate risk profile, and a third for conservative investors. In the Moderate Portfolio–for which S&P currently recommends investors put 45% in domestic equities, 15% in foreign equities, 25% in bonds and 15% in cash–the entire portfolio can be assembled with seven ETFs or less. (See Moderate Portfolio table below.) As one might expect, the conservative portfolio takes a less risky approach, with no exposure to emerging markets, and a higher cash position, while the growth portfolio has a much lower cash position and bigger allocations to international equities as well as small- and mid-cap domestic equities. Advisors can customize each and every ETF Asset Allocation Portfolio according to each client’s investment goals and risk tolerance.
Of course, each allocation could be made in dozens of different ways, using ETFs other than those identified in the table. If the S&P 500 index isn’t your cup of tea for gaining exposure to domestic equities, there are 432 other ETFs to choose from, according to Investment Company Institute data. Some track broad market indices, such as the iShares Dow Jones U.S. Total Market (IYY) or the Vanguard Total Stock Market (VTI), while others are organized according to market capitalization, sectors and industries, dividend yields, or price/earnings ratios. Likewise, there are 210 ETFs holding international equities, including funds tracking global or regional stock market indices or country specific indices in both developed and emerging markets.
While assets held by U.S.-listed equity ETFs jumped from about $80 billion in 2001 to more than $400 billion in March, 2009–undeniable proof of their appeal to investors–there are many other reasons such instruments are gaining favor with advisors and investors alike, particularly intraday trading capability, tax efficiency, and low cost.
But the benefits of bond ETFs are less clear. There was about $70 billion invested in U.S.-listed bond ETFs in March 2009–a large gain from zero in 2001–yet still far behind the popularity of equity ETFs.
Advocates for bond ETFs point out that many bond issues trade irregularly, making it hard to get an accurate price. Because ETFs are listed on an exchange and traded through the day, investors have the convenience of intraday trading as they do with equities. Furthermore, they can be sold short to protect against rising inflation. And, they can provide excellent diversification at low cost.