The New Frontier: Building ETF Portfolios

by: Carl T. Delfeld

Coming back from speaking at the Money Show in Las Vegas last week, it occurred to me that many attendees, by chasing the best stock and ETF picks, are barking up the wrong tree. There is an opportunity for advisors to bring these independent-mined investors in as fee-based clients. While at the MoneyShow, I did an interview with Karen Gibbs on several topics, including “Get Organized and Get Ahead.”

With one thousand ETFs now trading on U.S. markets, most investors, and I would bet many advisors, are overwhelmed. The new frontier for ETF focused investment advisors is creating ETF portfolios that can be used as custom building blocks for clients. In short, the key is organizing ETF holdings in a flexible manner to help client portfolios get ahead. Putting these ETF portfolios together is not only good for the client but can be a key selling point for advisors in bringing prospects into the fold.

Here are a few examples of ETF model portfolios that can be combined to suit a client’s particular needs and financial goals.

A good place to start is with a global core portfolio that has some broad core equity holdings such as SPY, IOO, PID, VWO and EFA. Add some country and sector overweights such as nuclear power (NYSEARCA:NLR) or small cap Japan (NYSEARCA:JSC), and another bucket for commodities and/or precious metals such as silver (NYSEARCA:SLV). Next add fixed income and currencies into the equation using ETFs such as TIP, the dollar bull (NYSEARCA:UUP) or the ultra inverse euro (NYSEARCA:EUO). Finally, top off your global asset allocation with cash and inverse equity ETFs which serve as “shock absorbers” in turbulent markets.

Once you have the global core in place, you can turn to building a series of explore portfolios. You can bring these into the mix based on your portfolio reviews and client consultations.

One of my favorites is an emerging market portfolio that goes beyond the usual equity only approach by making allocations to emerging market fixed income and currency ETFs such as EMB and CEW. You could build a separate bond ETF portfolio, a precious metals ETF portfolio, a foreign currencies ETF portfolio or a natural resources ETF portfolio.

The sky is the limit. Some clients may like a geographic focus such as Asia or a bent towards small cap-oriented ETFs. A few might prefer including an aggressive emerging market portfolio that goes beyond the BRICs to countries like Poland (NYSEARCA:PLND), Turkey (NYSEARCA:TUR) or Indonesia (NYSEARCA:IDX). I have found that many like a country rotation strategy as a way to increase international exposure.

One ETF portfolio that should be at your fingertips is a Defensive ETF portfolio that contains some fixed income, precious metals, defensive sectors like consumer staples and inverse ETFs. When markets get choppy and move into reverse, bringing this portfolio into play can soften the blow to the overall portfolio.

The real point here is that it is far easier to manage a grouping of model portfolios than to manage hundreds of custom global portfolios. Using a global allocation process will make advisors look more professional and importantly, better organized.