In today’s ETF Strategist update, I’ll answer two questions that came in this week. Here is a summary, and I go into further detail in the short podcast that accompanies this update.
First, a reader wanted to know if he could use only four funds in his ETF portfolio. The answer is absolutely yes.
You can do an allocation with a smaller number of funds, but these need to be rebalanced. You can’t just select four funds tracking different asset-class indexes, put 25% of your investment capital into each fund and call it a day. You must rebalance at intervals as market conditions change.
We put a four-fund allocation into the first issue, representing aggressive, moderate and conservative risk tolerances. To begin with, the portfolios hold a 25% allocation into each fund. However, that won’t be a “forever” allocation; we’ll send you updates as necessary.
The second question I want to answer concerns the “why” of the funds. Why are we holding these specific funds in the portfolio? What are their inclusions designed to accomplish?
This is an important question and one that I routinely discussed with my asset management and financial planning clients.
Let’s use the tactical “Undiscovered” portfolio today as our example, and I’ll address the strategic allocations in the weekly updates and in upcoming ETF Strategist issues.
The undiscovered portfolio consists of smaller or lesser-known ETFs, allocated to capture gains in very specific asset classes showing promise.
Funds in the Undiscovered Portfolio:
OILK: This energy-sector fund is on an upward trajectory, so we’re capturing that upside. We’ve included this fund to track the energy sector, which has led the S&P in the past several months.
EUM: This fund shorts emerging markets. In the big picture, I’m bullish on emerging markets, and they tend to show more gains over time than developed markets, but they are also more volatile. At the moment, with emerging markets still a beaten down asset class, this fund adds some stability to the portfolio, with a return of 3.15% in the past month.
Note: These “short” ETFs are not buy-and-hold investments. We’ll eventually be trading out of this and will send you an alert. But for now, this fund captures weakness in emerging markets.
XSHQ: This fund tracks “small-cap quality” or small companies with low financial leverage and solid returns on equity. That limits your risk while also capturing returns of small caps, which over time, outperform larger companies.
DGT: This ETF tracks the Global Dow, which consists mostly of non-U.S. equities. These are large, financially stable companies that do business around the world. This fund gives you exposure to stocks outside the S&P 500 or the Dow. You have broader economic exposure, and it gives you global diversification, something most U.S. investors overlook.
In the next update, I’ll begin reviewing the purpose of ETFs in the aggressive, moderate and conservative portfolios.