ETFs for All Ages

Just as in picking funds, choose an ETF portfolio appropriate for your stage in life.
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Creating a portfolio with exchange-traded funds can work really well for the fix-it-and-forget-it investor like myself.

I want to invest wisely, but after the decision is made, please don't bother me about it again. I have to be at my son's baseball game and then figure out how to make purple icing for my daughter's birthday cupcakes.

As a refresher, an ETF is a single security that represents a basket of stocks that track an index. So that means while they look like index funds, these things actually trade like stocks. That also means you'll pay your broker a commission fee every time you buy or sell. So, if you're planning on making monthly contributions to your portfolio, ETFs might not be your best option.

The upside, though, is that ETF shares can easily be converted back to cash and don't have short-term redemption fees like many mutual funds do. That means you won't have to pay an early withdrawal charge because you withdrew the money before a specified time. And since ETFs basically mirror an index, you don't have to worry about excessive portfolio turnovers translating into capital gains hits come tax time.

So, if you have some money to park and forget, these things could be the way to go. We'll offer some very basic sample portfolios for the different stages of life. Of course, there's no cookie-cutter answer -- your investment choices depend on your own situation -- so don't take these portfolios to the grave.

The Swinging Single

The upside to being young (aside from lack of responsibility and the ability to stay up past 10 p.m.) is that you can take on more risk. So, if your stomach can handle it, go ahead and be aggressive. Throw it all in the stock market.

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Most pros would recommend that you put anywhere from 60% to 70% of your money in domestic stocks, with the remainder invested overseas.

So, on the domestic side, consider using a broad total-market index fund. There are many out there, but since they all closely correlate to the broad market indices, the expense ratios become the biggest differential, says Dan Culloton, a senior fund analyst at Morningstar.

So, why not go with the cheapest? The

Vanguard Total Stock Market VIPERs

(VTI) - Get Report

is the clear winner, with an expense ratio of 0.07%. It follows the MSCI US Broad Market index, which consists of all the U.S. stocks traded regularly on the New York Stock Exchange, American Stock Exchange or over-the-counter markets.

Your other option is the

iShares S&P 500 Index

(IVV) - Get Report

, with an expense ratio of 0.09%. It invests at least 90% of its assets in

S&P 500


On the international front, consider the

iShares MSCI EAFE Index Fund

(EFA) - Get Report

, suggests Culloton. This ETF mirrors the Morgan Stanley Capital International Europe, Australia and Far East (MSCI EAFE) index and is composed of about 1,000 companies that trade on 20 stock exchanges around the world (not including the U.S., Canada and Latin America). Can't get much more international than that.

If you're truly feeling aggressive, you could put a piece of your international portion in emerging markets. No more than 5% of your international piece, though, should be in these risky areas. But if you're willing to take the chance, the

Vanguard Emerging Markets Stock VIPERs

(VWO) - Get Report

will do the job at a low cost and will get you some exposure to those so-called untapped markets.

Going with an overall emerging-market fund is a much better way to take a risk than throwing your money in, say, a China fund. While China may be the flavor of the month, flavors come and go. And, remember, you don't want to flip ETFs too often, because the commissions on your buys and sells will start to add up. So you're better off putting your money in a fund with a longer-term outlook.

The Al Bundy Portfolio

If you're married with children and looking at college and weddings within the next 10 years, you'll need to add a bit more conservatism to your ETF portfolio.

For folks in this stage of life, many pros would recommend that you put around 60% to 70% in equities and the rest in bonds. And on the equity side, cut back your international exposure to 20% to 30%, recommends Culloton.

You can use the same funds as the single guy, but adjust your percentages accordingly. So, on the equity side, put anywhere from 70% to 80% of your equity allocation in the Total Stock Market VIPERs, with only 20% to 30% in the iShares MSCI EAFE Index Fund.

Then you should look at some bond funds for the remainder of your portfolio. And the

iShares Lehman Aggregate Bond

(AGG) - Get Report

is a great overall choice because it mirrors the Lehman Brothers bond index. Just know that some of its holdings have longer durations and are therefore vulnerable to interest rate fluctuations.

"But given

the fact that we're in a period of rising interest rates, it may be more prudent toselect a more conservative fund with shorter durations," Culloton says. So, check out the

iShares Lehman 1-3 Year Treasury bond

(SHY) - Get Report

. With this fund, you won't have to worry that your profits will be eaten away by interest rate increases.

The Golden Years

As you approach retirement, you'll want your allocation to be more heavily weighted in fixed income. Just don't leave the equity world completely. Your portfolio should probably be 60% to 70% in bonds, with only 30% to 40% in stocks.

And while you can go with the same bond funds as the married folks, you may want to consider supplementing or replacing your equity choices with ETFs that focus on dividends. That way you can generate more income for your portfolio.

If dividend-producing stocks appeal to you, check out the

iShares Dow Jones SelectDividend Index

(DVY) - Get Report

and the

SPDR Dividend

(SDY) - Get Report

. The iShares has a higher yield -- but you can't go wrong with either.

Just keep in mind that these dividend ETFs tend toward the large-cap side of the equity world, so make sure the rest of your equity portfolio is diversified in the other areas.

For more help in creating your own ETF portfolio be sure to pick up Morningstar's

ETF 100:2006

book, which details the top 100 ETFs available. And then check out Fidelity's "

Build anETF Portfolio " tool. It allows you to pick different ETFs and adjust the weightings in your hypothetical portfolio.

So, if life prevents you from being able to manage your money on a daily basis, consider creating an ETF portfolio for yourself.

And if you know where I can buy purple icing, please let me know.

Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for 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 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;

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