All-ETF Portfolios

6/21/2010


Exchange-traded funds are gaining popularity, and for good reason.

Assets invested in ETFs have surged, spurred by solid relative performance, low costs, and ease of trading relative to traditional mutual funds. At the end of May, total assets in ETFs were roughly $788 billion, up 34% from a year earlier. Here are three attributes that separate ETFs from traditional funds:

• Easy access to the market. ETFs trade throughout the day like stocks. Most can be purchased on margin.

• Low costs. Most ETFs track index funds. ETFs tend to have modest expense ratios and be fairly tax-efficient.

• Profits on the downside. Unlike traditional mutual funds, many ETFs can be sold short. When investors sell short, they borrow shares and sell them, planning to purchase the shares later at a lower price.

Our recommended fund portfolios consist of traditional open-end mutual funds, partly because of the selection — there are nearly 10,000 no-load mutual funds. In contrast, there are fewer than 1,000 ETFs, of which more than half have less than three years of trading history.

Many of the newer ETF offerings are gimmicky or highly specialized, tracking narrowly defined strategies or little-known indexes. In addition, selection remains skimpy in some areas. For example, only six ETFs follow a balanced approach, investing in both stocks and bonds.

Still, ETFs represent a good choice for frugal investors who believe in the benefits of indexing. ETFs provide the same diversification and market tracking as traditional index mutual funds — often with lower expense ratios.

The table below presents two all-ETF portfolios that roughly correspond to the funds and recommended allocations in our Growth and Conservative portfolios shown below. Assuming a commission of $10 per trade, the total cost to purchase either portfolio is $140. The all-ETF Conservative portfolio has an annual expense ratio of only 0.28%, while the all-ETF Growth portfolio is 0.30%.

QUALITY ETFs
— % of Portfolio —
ETF (Price; Ticker)
Conser-
vative
(%)
Growth
(%)
Exp.
Ratio
(%)
Yield
(%)
Category
iShares Barclays MBS
($109; MBB)
5
0
0.34
3.6
Ginnie Maes
iShares MSCI EAFE Value
($45; EFV)
8
6
0.40
3.4
Int’l large value
iShares S&P 500
($112; IVV)
5
5
0.09
1.9
Large-cap blend
iShares S&P Conservative
($28; AOK)
0
6
0.30
2.2
Balanced bond bias
iShares S&P MidCap 400
Gro. ($84; IJK)
8
9
0.25
0.6
Midcap growth
iShares S&P Moderate
($28; AOM)
5
8
0.31
2.0
Balanced stock bias
iShares S&P SmallCap 600
Gro. ($62; IJT)
8
9
0.25
0.5
Small-cap growth
Rydex S&P 500 Pure
Growth ($36; RPG)
7
8
0.35
0.5
Large-cap growth
SPDR Barclays Cap. High
Yield ($38; JNK)
5
5
0.40
11.7
High-yield bonds
SPDR DJ Small Cap Value
($62; DSV)
8
9
0.27
1.8
Small-cap value
SPDR S&P Dividend
($48; SDY)
8
9
0.35
3.6
Large-cap value
SPDR S&P Int’l Small Cap
($25; GWX)
5
6
0.59
1.6
Int’l small growth
Vanguard Emerging Mkts.
($40; VWO)
0
5
0.27
1.4
Emerging market
Vanguard FTSE All-World
($41; VEU)
6
6
0.25
2.2
Int’l large blend
Vanguard Mid-Cap Value
($48; VOE)
7
9
0.14
1.8
Midcap value
Vanguard Total Bond Mkt.
($80; BND)
15
0
0.12
3.8
Interm. bonds

If you seek to fill a void in an existing portfolio, the 16 ETFs above are decent stand-alone picks. Notably, SPDR Dow Jones Small Cap Value ($62; DSV) ranks among the top 1% of small-cap value funds for five-year returns. The fund, holding more than 800 stocks, charges a fee of only 0.27%. iShares Barclays MBS ($109; MBB) stands out among bond funds. The Ginnie Mae fund, yielding 3.6%, has an expense ratio of 0.34%.

FORECASTS FUND RECOMMENDATIONS
Through June 15, our recommended Growth Portfolio has returned 1.1% for the year, versus a decline of 0.9% for its benchmark portfolio. The Conservative Portfolio has returned 1.5%, versus a loss of 0.2% for its benchmark.
— Year-to-Date —
—– % of Portfolio –—
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
American Century Heritage
($17; TWHIX)
6.8
B
8
9
86
Dreyfus Small Cap Stock Index
($18; DISSX)
7.6
B
0
0
67
Fidelity Export & Multinational
($19; FEXPX)
(1.6)
D
7
8
39
Fidelity Leveraged Co. Stock
($24; FLVCX)
6.1
C
0
0
67
Heartland Select Value
($26; HRSVX)
3.4
E
7
9
90
Heartland Value Plus
($26; HRVIX)
10.1
A
8
9
95
T. Rowe Price Int’l Discovery
($36; PRIDX)
(2.5)
C
5
6
89
T. Rowe Price New Horizons
($28; PRNHX)
8.5
A
8
9
96
Vanguard 500 Index
($103; VFINX)
0.9
B
5
5
62
Vanguard Dividend Growth
($13; VDIGX)
(0.6)
D
8
9
96
Vanguard Emerging Mkts.
Stock Indx. ($25; VEIEX)
(3.1)
C
0
5
89
Vanguard GNMA ($11; VFIIX)
4.5
B
5
0
93
Vanguard Inter.-Term Tax
Exempt ($14; VWITX)
1.9
C
0
0
73
Vanguard International Value
($28; VTRIX)
(9.1)
D
8
6
89
Vanguard Short-Term Invest.
Grade ($11; VFSTX)
2.4
B
0
0
78
Vanguard Total Bond Mkt. Index ($11; VBMFX)
3.8
C
15
0
77
Vanguard Total Int’l Stock
Index ($13; VGTSX)
(7.1)
C
6
6
91
Vanguard Wellesley Income
($21; VWINX)
2.6
A
0
6
99
Vanguard Wellington
($29; VWELX)
0.6
D
5
8
93
Wells Fargo Advantage High
Income ($7; STHYX)
1.7
E
5
5
36
* Year-to-date ranks through June 15 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%. Fund ratings are percentile ranks based on our fund-rating system.

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