ETF Investing Guide: What To Buy In Which Account

by: David Jackson

Now that we have a list of nine ETFs (in the table) that comprise our core portfolio, the only thing missing is the percentage to allocate to each one. That’s a function of the asset allocation you decide on, in particular the percentage of your assets you wish to allocate to stocks and the percentage to other types of investments.

Most people will have more than one account, including for example a taxable regular brokerage account and a deferred-tax investment retirement account ("IRA"). When you purchase a portfolio of ETFs, you can view your accounts as a single virtual account, and buy each ETF in only one actual account, instead of buying the full proportionate portfolio of ETFs in each account. That way you’ll minimize the number of buy and sell transactions, and lower your costs.

You may also choose which ETFs to purchase in which account based on taxes. Income from REITs, for example, is currently taxable at regular income tax levels. So you may want to purchase the REIT index fund in your tax-deferred account. Similarly, interest payments from corporate bonds are subject to regular income taxes (federal, state and local), whereas US Treasury bonds are exempt from state and local taxes, but exposed to Federal taxes at current income rates. So you may want to purchase the corporate bond fund index in your IRA, and perhaps also the US Treasury bond index funds. Dividends from US companies are currently taxable at 15%, so you may want to hold the US index fund ETFs in your taxable account (those funds should pay you dividends), whereas in many cases dividends from foreign stocks are taxable at current income tax rates, so you may want to purchase them in your tax-deferred account.

Here’s an example. Let’s assume your desired asset allocation (in addition to ownership of your house, etc) is as follows:

  • Bonds 20%, Of which:
    • Corporate 8%
    • US Treasury short term 8%
    • US Treasury med term 4%
  • Stocks 70%, Of which:
    • US large cap 20%
    • US medium cap 20%
    • US small cap 20%
    • International 5%
    • Emerging mkts 5%
  • Real Estate 5%
  • Cash 5%
  • Total 100%

Let’s assume you have four accounts:

  1. IRA 1: $175,000
  2. IRA 2: $180,000
  3. Regular brokerage account (taxable): $120,000
  4. Money market fund account (cash) $25,000

(Total: $500,000)

You could purchase ETFs in your accounts as follows:

  • IRA 1: $175,000
    • Corporate bond index fund LQD $40,000
    • Treasury bond index fund SHY $40,000
    • Treasury bond index fund IEF $20,000
    • Foreign index stock fund EFA $25,000
    • Emerging market index stock fund EEM $25,000
    • Real estate index fund RWR $25,000
  • IRA 2: $180,000
    • Mid-cap US stock index fund IJR $100,000
    • Small-cap US stock index fund IJH $80,000
  • Regular brokerage account: $120,000
    • Small-cap US stock index fund IJH $20,000
    • Large-cap US stock index fund IVV $100,000
  • Money market account (cash): $25,000

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