As the popularity of exchange-traded funds grows, some investors may want to consider going all out and putting nothing but ETFs in their portfolios, says Michael Iachini, director of investment manager research at Charles Schwab Investment Advisory Inc.
Iachini offered three ways to build an all-ETF portfolio, ranging from "ultra-simple" to "very fine-tuned," in a Dec. 28 market insight on Schwab's "Research & Strategies" Web page.
The simplest way is to make just two trades into a total world stock market ETF and a total bond market ETF. The "middle of the road" approach would consist of about 10 ETFs. The fine-tuned portfolio for "engaged investors" would include 20 or more ETFs allocated toward market sectors expected to perform best.
"For the most part, it comes down to personal taste," Iachini wrote. "As a rule, ETFs provide excellent diversification at low ongoing expense, and compared to mutual funds it's much easier to see what stocks, bonds or other investments the ETF holds each day. If these are top characteristics you look for in your investments, owning nothing but ETFs may be a straightforward yet flexible solution worth a closer look."
Iachini's portfolio strategies come along as the robust growth of ETFs has caused investors to wonder whether an all-ETF portfolio is possible—or well advised. To be sure, there is strength in the numbers. According to recent Lipper data, U.S.-domiciled mutual funds had a strong fourth quarter in terms of their performance, but they could not keep up with exchange-traded funds in terms of inflows. Equity fund flows into ETFs were close to $37 billion in fourth-quarter 2010 compared to just $18 billion for mutual funds.
"As investors move from being out of the market to getting into it, they appear to be risk adverse and thus favor passive, index-based investments like ETFs," said Lipper analyst Matthew Lemieux in a phone interview on Friday with AdvisorOne.com. Extensive marketing efforts on the part of ETF distributors, financial advisors and discount brokers are contributing to this trend, Lemieux added.
To wit, Iachini's interest in ETFs as well as index mutual funds. In his insight, he acknowledged that an all-ETF portfolio means giving up actively managed mutual funds, which may outperform index ETFs through skillful selection of
