Dave, How do you select the ETF’s for your Model Portfolio?
How do you select the ETF’s for your Model Portfolio. There are so many ETF’s out there, what is the best way to narrow down the choice?
Jaanus P. – Tallinn Estonia
It is a great question for sure.
We suggest that there are three major considerations when deciding which ETFs to hold in a portfolio – cost, allocation, and performance. Some ETFs are very low cost. For instance, Vanguard and Blackrock lead the way in low-cost ETFs, sometimes as little as .05%. The question is, what am I getting for that low cost? Is it a clean reflection of the benchmark’s asset class holdings? Or, do I want to the ETF to be a little different than the benchmark’s holdings?
That’s where allocation comes in. Allocation means the asset classes or the specific holdings in the ETF. Index ETFs attempt to hold the exact number and weight of the benchmark’s holdings. However, other ETFs are rules-based and hold fewer positions or different positions than the benchmark index. An investor may add an ETF like this to create a portfolio that is slightly different than the benchmark. This is usually an attempt to add alpha or outperformance while keeping the risk level very close to the benchmark.
Lastly, performance is what really matters. If the ETF you’re using consistently outperforms an index ETF but it costs a little more, it may be worth using it instead of the low-cost index ETF.
This type of information can be found on the ETF provider’s website or through some research providers. Some providers may give rankings of their ETF recommendations. Be careful of a research provider that recommends only their own ETFs for everything.
It is true that there are many choices for ETFs. We encourage investors to consider the ETFs we use in our model portfolio, as we have selected them using this very process.
You might consider the ETFs we use in our model portfolio, as we have selected them using this very process. If you choose to use other ones, first decide on your portfolio’s asset allocation and then use your preferred ETFs in a proportion that will allow you build out the overall allocation.
Hope that helps,
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