ETF Investing Guide: How to Assemble a Core ETF Portfolio

by: David Jackson
  • It only takes ten or eleven ETFs to give you broad and granular exposure to the US stock, bond and real estate ("REIT") markets, plus the stock markets of the largest developed and emerging economies (A Core ETF Portfolio).
  • This ETF portfolio will have lower fees and expenses than any portfolio of mutual funds I’m aware of. (See the comparison with Vanguard index mutual funds in The 7 Advantages of ETFs Over Index Mutual Funds.)
  • A simpler porfolio of only 5 ETFs offers the same diversification, but with slightly higher annual expenses and lower flexibility (The Low-Maintenance ETF Portfolio).
  • A portfolio of ETF index funds is highly diversified; in contrast, a portfolio of actively managed mutual funds can suffer from overlap and thus concentration in particular stocks (So You Thought Mutual Funds Help You Diversify?).
  • The core portfolio omits the most popular ETFs ((NYSEARCA:DIA), (NASDAQ:QQQ) and (NYSEARCA:SPY)) because the indexes they track are too narrow, they are concentrated in a particular sector, or a lower cost alternative is available (Why You Shouldn't Own DIA, SPY or QQQ).
  • Pick an online brokerage based on the cost per trade, the ease of managing your portfolio, the ability to identify tax lots and track realized and unrealized gains and losses, and the availability of banking products to maximize the interest earned on cash (The 4 Criteria for Picking a Brokerage).
  • Don’t underestimate the importance of interest earned on cash. Many investors currently have a large proportion of their assets in cash, so better interest on cash can outweigh cheaper trades. And as interest rates rise, this becomes more important (The 4 Criteria for Picking a Brokerage).
  • Consider consolidating your bank accounts (savings and checking) and brokerage accounts (taxable and retirement) with a single online broker. That allows you to see your total assets more clearly, and thus your asset allocation (The 4 Criteria for Picking a Brokerage).
  • Expect the largest online brokerages to introduce tools to make asset allocation and portfolio management easier, and to offer increasingly sophisticated online banking tools.

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