Easy ETF Portfolios for Any Age
Exchange-traded funds have been gaining ground on mutual funds for some time now, especially with the increasing number of investors looking to ditch their pricey portfolio managers and branch out into the DIY realm. Building your portfolio from scratch might seem like a daunting task, but most of the same strategies that work with mutal funds also work for ETF investing. If the prospect of navigating uncharted ETF waters still seems a little overwhelming, don't worry--whether you're just starting out or looking to retire soon, these ETF gurus can help guide the way.
For the younger crowd. With student loans, rent, groceries, and other spending priorities, there's probably not a whole lot of money lying around at the end of the month. But just because you're on a budget doesn't mean you can't start investing for the future. Although there are hundreds of ETFs to choose from, the trick is to keep it simple, says
Benz recommends putting 70 to 80 percent of your total assets in the Vanguard Total World Stock Index (symbol
For the fixed-income portion of your portfolio, Benz recommends allocating 20 to 30 percent of your assets to the
Some experts say younger investors can get away with even fewer bonds--sometimes none at all. "There are certainly many intelligent people who say 100 percent stocks because you could shift into safer and safer stocks as you age," says
For those "other things," Early recommends throwing in a real estate investment trust (REIT) exchange-traded fund, which would make up about 10 to 20 percent of total assets. Although it might seem like a bad investment now with the unstable housing market, he says that historically, the performance of REITs have been uncorrelated with those of stocks and bonds. "That's really what you want," Early says. "You don't just want raw return. You want investments that 'zig' when the rest of your portfolio 'zags.'" That's also why he recommends a small allocation to precious metals such as the iShares
Although a simple ETF portfolio might seem like a "set-it-and-forget-it" plan, it's still important for investors to consistently reevaluate their asset allocations as their lifestyles and investment goals change. As you get closer to retirement age, financial advisors say it's generally a good idea to ratchet down the amount of risk in your portfolio and start thinking about increasing your fixed-income holdings to protect your investments. That means slowly raising your position in an ETF like BND, and even including some inflation protection further down the road with a TIPS ETF such as the iShares Barclays TIPS Bond fund (TIP).
For the young-at-heart. Although exchange-traded funds are marketed as no-fuss investments, they are not one-size-fits-all products. While a broad global stock ETF might be suitable for younger investors who can take on more risk, Benz steers investors approaching retirement away from the Vanguard Total World Stock Index (
For those nearing or in retirement, Benz favors separate ETFs for U.S. and foreign stocks:
For the bond portion of the portfolio, Benz recommends investing in a few inflation-hedging funds as well as ETFs with shorter-term horizons. She recommends allocating 15 percent of assets to the iShares Barclays TIPS Bond (TIP), which only owns U.S. Treasury-issued inflation-protected bonds and helps diminish the effect of inflation. Another 10 percent of the portfolio should be in a short-term bond ETF such as the
Plan for pitfalls. ETFs are fairly simple investing tools, but it's still easy to fall prey to some common pitfalls. They usually beat out most investment products when it comes to tax efficiency and expense ratios, but the brokerage fees you pay to buy and sell ETFs affect your bottom line. "The expense ratios of most ETFs are typically lower than similar mutual funds," says
Gannon says investors can make sure they're getting the best deal by comparing the expense ratios for ETFs that track the same index. FINRA has a tool, Fund Analyzer, that allows users to compare ETFs based on a number of criteria, including operating expenses.
Finally, if you're new to ETF investing, don't get bogged down in the nuances and niche nature of these products. Over the past five years, ETF offerings have become increasingly granular and more complicated, Gannon says. Many times, sticking to broad-based ETFs that track more common indexes is the smartest--and simplest--way to go about building your ETF portfolio.
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