ETFs' Place in a Portfolio: Capturing an Effect

by: Roger Nusbaum

Roger Nusbaum submits: There is an article from IBD on Yahoo Finance about the new ETFs. There are some cautionary quotes from a couple of investment managers. Here's one: The WisdomTree approach seems to be "in style" now, but that could change in a couple of years.

I think this misses a big big point about how ETFs tie into a portfolio. An ETF captures some sort of effect. That effect is either in favor now or it is not. It makes no sense, for example to have your entire portfolio in five different mid-cap growth ETFs. Having one might make sense. Chances are if you do have one it is the one you think is the best one for that effect. It being the best one does change when the group rotates out of favor. As having nothing but mid-cap growth ETFs is not a good idea neither is having only dividend weighted ETFs.

However you assemble your portfolio you would logically own what you think is the best vehicle for each part of the market. If you are diversified you should expect some things to be doing well and some things not doing so well. Your success depends on the blend of strong and weak performers.