Five ETF Funds For All Markets

Posted on August 23, 2013 at 1:57 PM PDT by

Investors love complexity. They seem attracted, like moths to a flame, to investment funds that are marketed as “designed for this market.” ETF funds on the other hand, often are the market, a simple benchmark.

You see this trend playing out in the selling of “active” exchange-traded funds, also known managed ETF funds. These promise a little extra “zing” from active management. Naturally, that extra zing comes at a fee, so it better be a pretty good boost, right?

ETF funds

Here’s the thing: ETFs shouldn’t be played as active funds. They are the polar opposite of stock picking. If you’re going to run a portfolio with an asset allocation, then rebalancing is all the “active” you need.

So which ETFs work best in this context? It’s not rocket science. You want big, broad-market funds with a lot of liquidity. The idea is to get the funds that are the lowest cost to trade (no or low commissions from your brokerage), cost the least to own (low fund fees) and give you the narrowest bid-ask spread.

Easy to say, hard to do? Not really, here are five funds that fit the bill:

iShares Russell 3000 Index (IWV): Invests in the largest capitalization-weighted public companies domiciled in the U.S. and its territories, seeking to correspond generally to the price and yield performance of the Russell 3000 index. This is Apple, Exxon and GE, to name just a few of thousands.

iShares S&P Small Cap 600 Value Index (IJS): Holds securities of the S&P 600 index with the lowest price-to-book ratios. The fund’s holdings typically represent approximately 50% of the S&P 600 index market capitalization. Here you’ll find lesser-known companies such as Lasalle Hotels, Piedmont Natural Gas and Treehouse Foods.

Vanguard Total Bond Market ETF (BND): Seeks to track the performance of a broad, market-weighted bond fund index. The fund maintains a dollar-weighted average maturity consistent with that of the index, ranging between five and 10 years. This is U.S. Treasury bonds and mortgage bonds issued by Fannie Mae, among many others.

iShares MSCI EAFE Growth Index (EFG): Seeks investment results that correspond before fees and expenses to the price and yield performance of the MSCI EAFE Growth index. This is mostly large foreign companies, often with a global presence. Think Nestle foods, Toyota and drug companies such as Novartis.

SPDR Dow Jones REIT (RWR): Seeks to provide investment results before expenses that correspond to the Dow Jones REIT index. REITs are real estate investment companies that own office buildings, apartment complexes and the like: Simon Property Group, Public Storage and Boston Properties.

There are of course others. Am I “giving away the farm” in telling you all this? Of course not. That’s the point. These are the ETFs everyone uses to get exposure to these parts of the market. That’s why they are liquid, easy and cheap.

Rather, it’s ETF portfolio management and rebalancing that brings the kind of risk-adjusted return a retirement investor needs. No secret formula necessary, just plain old discipline.