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How to Build an ETF Portfolio

Start with a basic diversification that would give you broad U.S. and international exposure, including some emerging markets plays, as well as some fixed income, depending on your risk tolerance, says Culloton. If you're a risk taker and have time on your side, you probably could afford to go all-equities. If not, Culloton recommends that 10% to 30% be in fixed income.

For your U.S. exposure, the Vanguard Total Stock Market VIPERs (VTI) and the iShares S&P 500 Index (IVV) are relatively cheap. The iShares Russell 3000 Index (IWV) is also worth checking out, since its expense ratio is just 0.20%.

On the international front, consider the iShares MSCI EAFE Index Fund (EFA), suggests Culloton. This ETF mirrors the Morgan Stanley Capital International Europe, Australia and Far East Index (MSCI EAFE) index and is composed of about 1,000 companies that trade on 20 stock exchanges around the world (not including the USA, Canada, and Latin America). Can't get much more international than that. For emerging markets, there's the Vanguard Emerging Markets Stock VIPERs (VWO), which is cheaper than its iShares counterpart.

If your ulcer (or common sense) requires some fixed income in your portfolio, check out the iShares Lehman 1-3 year Treasury bond (SHY). Especially with the interest rate uncertainty out there, fixed income could be a wise choice.

Get Some Help

ETFs have been around for a while now, so there's a ton of info to help you make some good choices. But here are two good places to start.

Morningstar recently released its ETF 100: 2006 book, which details the top 100 ETFs available.

In addition, the company has created a "fair value measure" for each sector ETF. This is basically a report explaining why Morningstar feels each sector is either over or undervalued. For example, its analysts currently believe the real estate and energy sectors are overvalued, while the consumer products and financials sectors are undervalued. So now might be a good time to check out those sector ETFs.

This measure will soon be available on the Morningstar Web site, so be on the lookout.

You can also check out Fidelity's "Build an ETF Portfolio" tool . It allows you to pick different ETFs and adjust the weightings in your hypothetical portfolio.

Also, be sure to check out TheStreet.com's ETF section for new developments in the ETF industry, including new ETF offerings.

Many of us long for simplification -- like my poor mother, who can't seem to figure out how use the TV in my house -- but it has to make financial sense. So do some investigation before you decide if simpler really is better.

Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for wsj.com and the New York Post and her work has appeared in SmartMoney and on MarketWatch. Prior to freelancing, she spent four years as a senior writer for TheStreet.com. Before that, she was an accountant with Ernst & Young. She has a B.A. in English and economics from Lehigh University and an M.B.A. in accounting from Rutgers University. Byrnes appreciates your feedback; click here to send her an email.
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SYM TRADE IT LAST %CHG
IVV $208.85 0.85%
XLV $73.48 0.60%
IWV $124.87 1.22%
SHY $84.81 -0.01%
VTI $107.79 0.86%

Markets

DOW 17,890.79 -85.52 -0.48%
S&P 500 2,086.24 +25.22 1.22%
NASDAQ 4,947.4410 +56.2220 1.15%

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