Throughout this series of tips, I've focused on the pros and cons of exchange-traded funds. To sum up, here's the shortlist:
- ETFs generally don't make sense for dollar-cost averagers.
- The ETF industry has a bad habit of rolling out products that virtually no one needs.
- The proper care and feeding of ETFs involves periodic rebalancing.
- Owning both ETFs and actively managed funds is a smart asset allocation play.
Today's tip -- the last in this series -- picks up where we left off: ETFs make assembling a well-diversified portfolio relatively light work. And as I frequently point out in my Champion Funds newsletter service, tending to that important chore (a.k.a. intelligent asset allocation) is Job One for every savvy fund investor.
ETFs can certainly provide a low-cost, tax-efficient way to get that job done, too. Let's say you're a fairly aggressive investor with a timeline of 10 to 15 years and a stomach for some measure of volatility. With a profile like that, you might consider allocating the lion's share of your portfolio to large caps and then further dividing that slice of the pie chart between the likes of Spiders (AMEX:SPY), an ETF that tracks the S&P 500, Cubes (NASDAQ:QQQQ), which shadows the tech-heavy Nasdaq 100, and iShares Russell 1000 Value Index Fund (AMEX:IWD), which as its name suggests hews to the stock market's discount aisle.
To be sure, holding each of these ETFs will lead to a measure of overlap. Microsoft (NASDAQ:MSFT), Comcast (NASDAQ:CMCSA), and Oracle (NASDAQ:ORCL), for example, appear in the lineups of each of the funds, while Spiders and Cubes have both Amgen (NASDAQ:AMGN) and Dell (NASDAQ:DELL) in common, among others.
Still, while the exact percentages you'll allocate to each ETF will depend on your investing temperament, holding each of these puppies provides quick and easy (and cheap!) exposure to the full style spectrum (i.e., growth, value, and core) of the large-cap market. Moreover, after you have this portfolio "anchor" in place, you can look down the cap range -- and out to foreign shores -- to diversify further. And, yep, there are plenty of quality ETFs on the market that can help you do just that.
The bottom line is this: Some assembly is required, but for buy-and-hold investors with money to plunk down all at once, ETFs offer a convenient tool for putting together a smart portfolio.
This article was originally published on Jan. 24, 2005.
Shannon Zimmerman writes regularly about index funds and ETFs in his Champion Funds newsletter service, which offers a 30-day free trial, risk-free. Shannon doesn't own any of the securities mentioned.
The Motley Fool announces its online lottery, FOOLottery !
