Jim Wiandt's Five Favorite ETFs

Includes: BND, DJP, DLS, GLD, VTI
by: Jim Wiandt

Here they are. Five ETFs I REALLY like. Some of you will call me nuts. Some will have seen these coming all along.

But first - Heather is really sending in the good links recently. Check out this recent trip to Cukesville that she emailed me. If THAT guy is a guru, I am...scared. It's just got a lot of fundamental errors in it. Long on passion and short on facts...much akin to a large portion of Internet content, which spews alienated anger and not much else. If you want to read a great article (and have not already) check out this recent piece by Larry Swedroe. It similarly has an invective-fueled rant in the comments following the article. Um, my money is with Swedroe in that discussion.

That one (Cukesville anti-ETF rant) reminds me of the insane (but incredibly thoroughly written and "researched") article that held that the gold exchange-traded products GLD and IAU were conspiracies by the giant fund managers (i.e., SSgA and BGI) to drive up the price of gold, watch the funds collapse and make a killing on a massive hidden short position. Just on its face that is nuts in so many ways. SSgA and BGI don't need to risk their companies and try to make a few hundred million dollars illegally. They seem to be doing just fine the legal way.

Anyway, GLD and IAU certainly now, finally, bring me to my list of "Five ETFs I Like." This is going to show my prejudices absolutely. Look at these as a sort of "all-time favorites" list for me. PLEASE go ahead and berate me on this. I know there are hardcore indexers that will REALLY disagree with some of these, and the new paradigm and active guys who will disagree with omissions. Hey my eyes are always open, but here are five funds I just love.

5) WisdomTree International Small Cap Dividend funds (NYSEARCA:DLS). I love this fund for what it did...finally opened up international cap investing. And, criticize it for not being market-representative if you want, but it also has a nice little value tilt as well that I actually kind of like. I'm a closet DFA guy (don't tell anyone). I've always been a proponent of more small and value investing than the cap weighted total market has. And the guys at WisdomTree finally got it done. And at a reasonable price point. Now of course, the flood doors will open with iShares and all the others (DFA are you out there?) are sure to pile into the space (or I hope so). Good luck finding ANY style in Europe (outside of what the Italian teenagers are wearing) or internationally. It will come.

4) iPath DJ AIG Commodity (NYSEARCA:DJP). I loved DBC for what it did (a la DLS): brought real innovation to the market and opened up an asset class that was realistically an uninvestable one for retail investors. Then DJP one-upped it by bringing in the established DJAIG index into the picture and by bringing an enormous potential tax efficiency and zero tracking error (albeit one accompanied by issuer risk, which is new to the exchange-traded product scene). This is absolutely a legit diversifier...and not just because commodities have gone through the roof in recent years. We'll see about the tax issue when/if the IRS issues the private letter ruling we're seeking on these funds through ETFR. The note structure could change things entirely. Heck, now even Goldman is in the space...Kudos to iShares for not only keeping the lead spot but really pushing forward on innovation through its cooperation with Barclays Capital. Kudos also to them for clearly branding AWAY from iShares so people know these are something different. In Europe, there are two products trading on exactly the same index.

3) The Vanguard Total Bond Market Fund (NYSEARCA:BND). I know there are still some investors who are a little spooked by Vanguard bond funds after that one meltdown a few years ago (and for you there's AGG or TIP) But their performance since has been stellar - right in line with the equity funds. And this fund has a KILLER structure. It's one of the clear-cut cases where the two-share class format Vanguard uses brings huge benefits to investors. Why?

Well for one, you get a WAY more diversified bond portfolio than is realistically possible in a pure ETF structure. Because the managers can bring in whatever they want as the cash flows in, it keeps things fluid, easily balanced and wildly diversified (BND holds over 3,500 issues, as opposed to the iShares and SPDRs Agg funds, which are at about 150 or so).

And to top that off - the real coup de grace for the fund - is that not only is it cheaper than the competitive funds, but again because of the fund structure, it's able to have an optimally liquid and easily tradable creation basket. Vanguard has smaller and more liquid creation baskets for BND because they're able to do a lot of work on the cash traditional fund side, and of course already had a massive portfolio when the ETF share class was launched. How about a total global bond product?

2) streetTRACKS Gold Shares (NYSEARCA:GLD). Ah, GLD. There's no explaining my preoccupation with it. I've loved this exchange-traded trust(?) since before it even existed. I followed every small development as it progressed toward reality. And then there it was...and there went gold prices. I like gold as a hedge. Something, as Matt says, I share only with nutters and some very smart people. I love the glamour, I love it as a major league buffer against falling markets, and well, it's shiny. And this is not the unsatisfying hedged exposure of a group of gold mining company stocks, it's the real deal. Thank you to everyone who brought this baby to market.

1) Vanguard Total Stock Market (NYSEARCA:VTI). I've got just two words to say on this one: "Total Stock Market" and "7 Basis Points" OK, that's more than two words. But this fund has got to be at the base of my famous 5-minute talk with friends and family to move you from the masses to setting yourself up for a better retirement than 80% or more of investors at your income level. That is: 1) Save money 2) get as diversified and low cost as possible and 3) leave it in there.

The truth is that if you just do that and use this one fund as your base for the long haul, you'll be putting yourself in good stead. If you let me expand my talk to 7 or 10 minutes, I might mention the part about moving to fixed income as you near retirement, adding in some international, and maybe a bit of extra small and value, or even the odd commodity or real estate fund.

But you've got to love VTI. The only thing that made me sad was when Vanguard abandoned the (now Dow Jones) Wilshire 5000 index for MSCI. I LOVE THAT index. My attachment was sort of like that of your first (indexing) true love. I understand the why (even better methodology) and the fund has held up well. Plus they're either getting it free for Vanguard investors or having MSCI pay into it, I assume. So I'll get over it.

By the way, this fund would be supplanted for me by a "Total Global Market" fund including EAFE and EM. Any takers? And a total capital markets balanced fund wouldn't be too far behind. Don't MAKE us launch an ETF of ETFs ourselves to make that happen...

Written by Jim Wiandt

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