3 Ways To Build a Model Investment Portfolio Using ETF’s

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I’ve written a lot about why I love ETF’s and in the last paragraph of Tuesday’s post I advocated people think about using them to build out their entire investment portfolio.

Now I know there are investors, advisors, market pundits that may have a different opinion on that, but I believe that in the universe of possibilities this is a very viable alternative.

My entire business is built on ETF’s. Well, let me rephrase that, a great majority of the investment portfolios are ETF based. Please remember before putting these portfolios in place I always start with a financial plan. From there, I get all the answers I need to construct a customized investment portfolio, not the other way around.

In this case, I’m going to present 3 model portfolios that are hypothetical in nature, but may be used as a point of reference for the target market of this blog, those in their 30’s and 40’s. Keep in mind these models are for the growth oriented investor, which is not for everyone. So let’s get to it:

Standard Model- Growth Oriented Investor

This model can be tweaked here and there for individual tastes but it can act as a template for those interested in learning more about ETF’s. The portfolio is broken down into different sizes and styles.

Large Cap Growth - 32%

• iShares Russell 1000 Growth (IWF) - expense ratio - .20% OR
• Vanguard Growth VIPERS (VUG) - expense ratio - .11%

Large Cap Value - 25%

• iSHares Russell 1000 Value (IWD) - expense ratio - .20% OR
• streetTRACKS DJ Wilshire US Large Cap Value (ELV) - expense ratio - .20%

Mid Cap Growth - 8%

• iShares Russell Mid Growth (IWP) - expense ratio - .25% OR
• Vanguard Mid Cap Growth (VOT) - expense ratio - .13%

Mid Cap Value - 8%

• i Shares Russell Mid Cap Value (IWS) - expense ratio - .25% OR
• Vanguard Mid Cap Value (VOE) - expense ratio - .13%

Small Cap Growth - 7%

• iShares Russell 2000 Growth (IWO) expense ratio - .25% OR
• streetTRACKS DJ Wilshire US Small Cap Growth (DSG) - expense ratio - .25%

Small Cap Value - 5%

• Vanguard Small Cap Value VIPERS (VBR) - expense ratio - .12% OR
• iShares Russell 2000 Value (IWN) - expense ratio - .25%

Large Cap Foreign - 6%

• iShares MSCI EAFE (EFA) - expense ratio - .35%

Emerging Markets - 4%

• Vanguard Emerging Markets (VWO) - expense ratio - .30%

Cash - 5%

Total 100%

Compressed Model - Growth Oriented Investor

This model is more abbreviated. You will see the different sizes but the styles are absent. For instance, in this model you will see a breakdown of different market caps (capitalizations), but won’t see the breakdown into growth and value (like above). Without further ado:

Large Cap - 60%

• iShares Russell 1000 Index (IWB) - expense ratio - .15% OR
• SPDR Index S&P 500 (SPY) - expense ratio - .10%

Mid Cap - 15%

• iShares Russell Mid Index (IWR) - expense ratio - .20% OR
• Vanguard Mid Cap (VO) - expense ratio - .13%

Small Cap - 10%

• iShares Russell 2000 Index (IWM) - expense ratio - .20% OR
• Vanguard Small Cap VIPER (VB) - expense ratio- .10%

Large Cap Foreign - 10%

• iShares MSCI EAFE (EFA) - expense ratio - .35%

Cash - 5%

Total - 100%

Concentrated Model - Growth Oriented Investor

This model is even more abbreviated. In Tuesday’s post I noted that having as little as one ETF in your account can deliver diversification. The following concentrated portfolio illustrates that idea.

Now I’d prefer to go with one of the first two options but for those that are concerned about commissions and prefer administrative simplicity, this may be an option.

Domestic Equity - 83%

• iShares Dow Jones Total Market (IYY) - expense ratio - .20% OR
• Vanguard Total Stock Market (VTI) - expense ratio - .07%

Large Cap Foreign - 12%

• iShares MSCI EAFE (EFA) - expense ratio - .35%

Cash - 5%

Total - 100%

There you have it 3 growth oriented portfolios made up entirely of ETF’s.

As you can see the expense ratios for all of these ETF’s are very attractive. A few more bullet points:

• The highest expense ratio on any modeled ETF is .35% on EFA. Compared to the expense ratios associated with (almost all) mutual funds this is a walk in the park.
• For the more aggressive equity investor you can easily tweak the allocation to add sector ETF’s or something like the QQQQ (Powershares NASDAQ 100 tracking ETF)
• For the less aggressive growth oriented equity investor you can easily tweak the allocation to invest between 10 and 15% into (AGG) iShares Lehman Brothers Aggregate Index, which will represent the fixed income component of the portfolio.
• One of the unique aspects of having an ETF based portfolio is the ability to write covered calls (among other option strategies) to generate additional income. This strategy works very well in the confines of a financial planning developed allocation.

I’m interested to hear if your allocation includes any of these ETF’s?

(Please remember none of this is to be construed as investment advice and refer to my site disclaimer for more on that.)

Tags: ETF, ETF sizes and styles, Exchange Traded Funds