Constructing a Portfolio the ETF Way

This creates an obvious scenario where a mix of ETFs and common stocks would seem reasonable and probably practical.

Another plausible scenario could be that an investor might be very comfortable owning individual bank stocks but not comfortable taking single-stock risk in more volatile parts of the sector, such as investment banks. This person might then have a mix of bank stocks and own one of the capital markets ETFs: iShares Broker Dealers Fund (IAI Quote) or KBW Capital Markets (KCE Quote) ETF.

Looking at this another way, there are many different ideas about how many stocks make a diversified portfolio. My number is around 40; some folks would say more, and some would say less. Any number of stocks that is close to 40 -- even 25, for that matter -- becomes a daunting task of time management keeping all of these holdings in order.

Incorporating ETFs into the mix becomes a time saver. Using the example of HSBC from above, if you own an ETF with HSBC as a large component in it, you probably only need to be in touch with current events. If you own the stock individually, you need to know a whole lot more. Now multiply that "whole lot more" by 40 stocks.

In the accounts I manage, I use whatever tool that I believe is the best way to capture the intended effect and that fits in with anything unique to the individual client. ETFs can be an effective, though not the only, way to accomplish this. You are your own client and should take advantage of all of the vehicles available to achieve your goals.