ETF Portfolios Guide – Advantages, Disadvantages, Newsletter
Arbor Investment Planner recognizes the need for an ETF portfolios guide to assist investors with smaller portfolios in their portfolio management decisions. The explosion in the number of ETFs means there is a large variety of ETFs to choose from today. ETF investing is almost as difficult as researching and purchasing stocks.
Our Arbor ETF Portfolios Newsletter provides three portfolios offering different approaches and three levels of targeted volatility: the ETF Conservative Portfolio, the Dividend & Income Portfolio, and the Aggressive Portfolio.
All three ETF portfolios consist of ETFs that are ultra low fee and most trade commission free at Fidelity Investments. These portfolios are especially beneficial for the apprentice investor and can be easily duplicated by investors with $2500, or even less. The goal is to keep expenses at a minimum.
The Arbor ETF Conservative Portfolio is a real-time global universe portfolio employing an adaptive asset allocation exclusively using value investing strategies. These are the same proven principles we use in the ultra successful AAAMP Value Portfolio; but instead of using individual stocks we use ETFs.
The Arbor ETF Dividend & Income Portfolio is a real-time global universe portfolio employing an adaptive asset allocation highly concentrated in dividend and fixed income ETFs. The portfolio tilts its asset allocation toward equities when valuations are bargains and toward fixed income when equity valuations are high.
The Arbor ETF Aggressive Portfolio is a real-time global universe portfolio employing an adaptive asset allocation with value investing strategies and momentum metrics. The core base of the portfolio is similar to the Arbor ETF Conservative Portfolio. However approximately 25% of the portfolio is based on value and momentum. The goal is to be more heavily invested in equities when the long term trend is higher prices and more heavily in conservative assets when the equity trend is lower prices.
What is an ETF?
An Exchange Traded Fund (ETF) is an investment vehicle; a hybrid of mutual funds, and closed-end funds. ETFs hold a basket of assets such as stocks, bonds, or commodities; and trade on a market exchange so they can be traded anytime stocks trade. Most ETFs track a specific index and trade very close to their underlying value (net asset value).
ETF investing advantages are lower costs, instant diversification, liquidity, tax efficiency, sector investing, the ability to purchase in small amounts, and the availability of a wide variety of alternative, and even exotic, investments.
Since ETFs trade like stocks, you can buy a diversified portfolio with the same low commission (typically $5) as a stock. Also, ETFs typically have lower expense ratios than mutual funds.
However, all the funds used in the Arbor ETF Portfolios are ultra low fee and most trade commission free at Fidelity Investments. The only caveat is you must hold the funds for at least 30 days to get commission free trading.
There are now hundreds of ETFs trading on U.S. stock exchanges. The variety is deep and wide, covering all major indices, sectors, industries, sizes (i.e. large cap, mid-cap, small-cap, micro-cap, etc.), strategies (growth, value, etc.), international (i.e. developed, emerging, and frontier markets), specific countries, and even exotic ETFs (commodities, short or bear funds, and leveraged funds).
There are also many ETFs in the income area. Bond ETFs include different terms (long, mid, short, etc.), various levels of quality (treasury, corporate, high-yield, etc.) and regions (United States, individual countries, emerging markets, etc.).
The Arbor ETF portfolios use a global universe of stock, bond, and real estate funds from which to choose the ETFs with the most favorable opportunity at any particular time.
ETFs trade on a market exchange so they can be traded (intraday) anytime stocks trade, not just at the end of the day. This can be an important benefit when volatility is high.
Since most ETFs are not actively managed, but are programmed to follow a specific index, they may not have high capital gains and income that are required to be passed on to owners each year. This means investors have more control over when they incur taxes.
ETFs can segment to very specific or targeted sectors of the economy. This allows investors to have a diversified position in a small slice of a sector where they want exposure.
Can Be Purchased in Small Amounts
Since ETFs trade like stocks there are advantages for position sizing. Small positions can be purchased (no minimum investment) to scale in or scale out of a position, or take a single small position in a particular ETF.
Available in Alternative Investments
ETFs allow investors to take positions in alternative or even exotic investments that are unavailable in any other form to small investors. New products become available regularly and include ETFs in commodities, hedges, and leveraged long and short positions in indices and sectors.
In order to get the maximum benefit of investing in ETFs it is important to identify and understand two crucial disadvantages. Fortunately, these shortfalls can be mitigated if investors have a clear comprehension of the disadvantages, and how the solution can help optimize their portfolio.
Many ETFs participate in over diversification. ETFs are generally not actively managed, but are programmed to follow a specific index. The index, and therefore the ETF, may not own the very best stocks.
It may be more advantageous to buy a limited number of the best companies rather than own the entire index. This would be particularly true with ETFs that track indices with a small universe of stocks such as a specific sector or industry.
Lack of Rebalancing
ETFs don’t rebalance their portfolios. Remember, most ETFs are programed to track an index. In an index, as the winners increase in price they become a larger percentage of an index. At the same time some stocks decline in price and become a smaller percentage of an index. By owning the index, or ETF tracking the index, you may own more of expensive over priced stocks and less of the bargain underpriced or value stocks.
Mitigating ETF Investing Disadvantages
Both of the above disadvantages can be mitigated by investing in a combination of ETFs and individual stocks. There are circumstances that are appropriate for ETFs and circumstances that are appropriate for individual stocks.
Smaller investors who use ETF funds exclusively to start, might consider adding individual stocks as their portfolio grows. I recommend starting this process once an investors portfolio reaches $25 – $35 thousand.
ETFs are the perfect investment vehicle for investors who are beginners, investors with smaller portfolios, or investors with larger portfolios that want significant diversification in a particular geographical area, sector, or industry. Used wisely they can be a valuable tool to lower risk and/or improve portfolio returns.
Getting Started With ETF Portfolios
Low Cost No Commission ETF Portfolios are the best approach for investors to get started with small investment amounts. The Arbor ETF Portfolios Newsletter is the perfect starter newsletter. Each portfolio is easily duplicated with $2,500, or even less.
Right now you can subscribe to 12 monthly issues plus e-mail notification of portfolio changes for $40/year. Subscribe now and you will receive a 10 day free trial. If the Arbor ETF Newsletter doesn’t meet your needs, just cancel and owe nothing.
Value Investing Portfolio Management Guides
Arbor ETF Portfolios Newsletter: ETF Conservative Portfolio, ETF Dividend & Income, & ETF Aggressive Portfolio
Dividend Value Builder - DVB Analyzer Newsletter & DVB Portfolio Newsletter
AAAMP Value Newsletter - Global Deep Value Asset Allocation Portfolio
While Arbor Investment Planner has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.