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The 3 Rs of Fine Tuning Your ETF Portfolio: Review, Rebalance, Reinvest

Lastly, consider reviewing your stop losses to ensure your risk management game plan is still in place. Trailing stops are a great way to ensure your sell point moves higher when the price of the ETF moves up with the market.

2. Rebalance

Another important mid-year consideration is to look at rebalancing any ETFs that have experienced an outsized move (either up or down) to bring them back in line with your target portfolio asset allocation. For example, the Market Vectors India Small Cap ETF (SCIF) has gained over 50% in 2014, which means an investment in this ETF will now have a much larger pull on the total portfolio than at the beginning of the year.

In addition, large cash distributions or transfers from your accounts can often skew the remaining portfolio positions to produce an asymmetrical asset allocation structure.

I typically only recommend rebalancing ETF holdings that are considerably out of line with your target percentage. Be wary of racking up trading fees to make small adjustments unless it's necessary to your overall investment goals. Fortunately, many brokerage companies are now offering commission-free trading on select ETFs to make rebalancing even easier.

3. Reinvest

The end of the quarter always signals a deluge of dividends from both equity and fixed-income holdings that will either be distributed as cash or reinvested as additional shares in the position. International holdings in particular often throw off big distributions this time of year as special dividends and fiscal year end profits are declared.

The iShares International Select Dividend ETF (IDV) recently declared a total distribution of $0.872161 with an ex-date of June 24. This single dividend payment represents 2.19% of the current share price, which is a significant impact to shareholders. This income will be paid several days later and should be considered part of your total return when calculating individual fund performance.

Everyone has a different rationale for handling dividend payments based on their unique preferences or cash flow needs. My preferred option is to reinvest the capital back into the original position. This allows you to continue to compound your investment, which will then lead to greater income or capital appreciation down the line.

Many brokerage companies allow you to reinvest your ETF dividends in fractional shares without paying additional trading commissions.

The Bottom Line

Constructing a portfolio of ETFs that work in harmony to generate wealth is only half the battle. Successful investors stay on top of their holdings and make subtle adjustments to fine tune their asset allocation at various points throughout the year. This can lead to better analysis and decision making when it matters most.

As always, having a plan and implementing it decisively will produce superior results.

At the time of publication the author had a position in IDV.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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