ETF Investing Guide: A Core ETF Portfolio

Now that we’ve seen the case for buying ETFs in an online brokerage account, we’ll look at how to assemble a portfolio in practice. Here's what we're going to end up with (the next section will explain why):

Important note: Since this was written in early 2003, new ETFs covering gold and emerging markets have been issued. Vanguard's emerging market ETF (VWO) is signficantly cheaper (has lower annual expenses) than iMCSI Emerging Markets Index Fund (EEM). See this article for more details on the Vanguard emerging market ETF versus EEM, and the comments below on adding gold to this portfolio using the ETF streetTRACKS Gold (GLD).

See Table Below:


ETFs for a Core Portfolio

ETF Ticker	Fund Name	Fund Description	Expense Ratio
(IVV)	iShares S&P 500 Index Fund	Large cap US stocks	0.09%
(IJH)	iShares S&P Mid Cap 400 Index Fund	Mid cap US stocks	0.20%
(IWM)	iShares Russell 2000 Index Fund	Small cap US stocks	0.20%
(EFA)	iShares MSCI EAFE Index Fund	Large cap foreign developed market stocks	0.35%
(EEM)	iShares MSCI Emerging Markets Index Fund	Large cap emerging market stocks	0.75%
(RWR)	streetTRACKS Wilshire REIT Index Fund	Real estate investment trust index fund	0.25%
(LQD)	iShares GS $ Investop Corporate Bond Fund	US corporate bonds	0.15%
(SHY)	iShares Lehman 1 to 3 Year Treasury Bond Fund	US short-term Governement bonds	0.15%
(IEF)	iShares Lehman 7 to 10 Year Treasury Bond Fund	US long-term Governement bonds	0.15%
(TIP)	iShares Lehman TIPs Bond Fund	US Governement inflation-protected bonds	0.15%

ETF Investing Guide Main Page
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Next: Understanding the Core Portfolio

Comments

[menaunt235:]

GIVEN TODAY'S MARKET WHAT WOULD BE REASONABLE PERCENTAGE ALLOCATIONS FOR THE ETFs IN THE CORE PORTFOLIO
ED MENAUNT

2007 May 20 01:46 PM

[Charlie Brown:]

Good question. The original guide had suggested percentages but the revised Jul 2006 ETF Investing Guide appears to have removed these and left the reader on their own. Here's the percentages from the original guide: where SP = percentage of stock, and BP = 1 - SP
IVV: SP * 0.25
IJH: SP * 0.25
IWM: SP * 0.25
EFA: SP * 0.0625
EEM: SP * 0.0625
RWR: SP * 0.0625
CASH: SP * 0.0625
LQD: BP * 0.4
SHY: BP * 0.4
IFE: BP * 0.2
This should add up to 100%. For example, if SP = 0.7, then IVV = 17.5%, EFA = 4.375%, LQD = 12%. I realize this does not directly answer your question but you may find these percentages a reasonable starting point.

--Charlie

2007 Jul 29 08:15 PM

[Sri:]

Here is a primer on how else ETFs can be advantageous:

creating-wealth.blogsp...

2007 Sep 24 11:29 AM

[mtwoman:]

Can you explain why it would be beneficial to pay for managing a bond fund instead of holding individual bonds?

2008 May 31 06:09 PM

[mtwoman:]

Could you explain why it would be beneficial to pay for an actively managed bond fund instead of holding individual bonds?

2008 May 31 06:11 PM

[David Jackson:]

mtwoman, first, to clarify -- the ETFs listed here are bond index funds, not actively managed bond funds.

There are a few reasons why you might want to buy a bond index fund instead of buying individual bonds:
- owning lots of bonds spreads the risk
- you only have to buy a single ETF, instead of researching and buying many individual bonds
- you don't need to worry about buying new bonds when your current bonds mature
- the spreads on buying and selling individual bonds, particularly illiquid muni bonds, can be wide.

At the same time, there are disadvantages. You pay a management fee, whereas buying from Treasury Direct is free. And you have more control over maturity dates if you buy bonds directly.

Hope that helps.
David

2008 Jun 01 05:19 AM

[IlanBrill:]

Has anyone calculated what was the actual performance of the core portfolio in 2008 given the suggested asset allocation and actual results? it would be quite interesting to see the results and compare with other managed funds etc.

Another point that i would love to hear David's comment on is now that the whole world and his wife are using ETFs on indexes isn't that by itself creating a bubble effect as huge amounts of assets gos into same stocks or bonds in the ETF and thus inflate their prices beyond real value (same goes when funds escape ETFs).

Thx & Happy New Year

2008 Dec 30 04:19 AM

[IlanBrill:]

Has anyone calculated what was the actual performance of the core portfolio in 2008 given the suggested asset allocation and actual results? it would be quite interesting to see the results and compare with other managed funds etc.

Another point that i would love to hear David's comment on is now that the whole world and his wife are using ETFs on indexes isn't that by itself creating a bubble effect as huge amounts of assets gos into same stocks or bonds in the ETF and thus inflate their prices beyond real value (same goes when funds escape ETFs).

Thx & Happy New Year

2008 Dec 30 04:21 AM

[stewart:]

how about David giving some thought to a dividend driven etf model portfolio with consideration for yield, growth and capital prevervation..

May 23 03:25 PM

[KTAN548:]

Hi David, any new updates on what an ETF Core Portfolio should look like in current climate? Is the one you mentioned above still applicable? Any changes or revisions? Please advise. Thanks.

Nov 19 06:06 PM