These days, I'm all about simplicity. Between juggling the kids, work and those obligatory social events (another birthday party?!), I'm generally too tired to deal with complications. That's exactly why creating a portfolio consisting solely of exchange-traded funds has a lot of appeal. With just a few of these funds, you can have total market coverage with very low expenses, very few tax issues and very little complications. So are exchange-traded funds the simpler way to go to create a well-rounded portfolio? It depends.
But there is a catch. Because ETFs trade like stocks, you have to pay a commission fee every time you buy or sell a piece of these things -- just like you would a regular stock trade. So if you're planning on making monthly contributions to your portfolio, ETFs might not hold an advantage over regular funds. In addition, if you're looking to beat the market as opposed to just keeping pace with it, you'll probably want to go with individual stocks or actively traded mutual funds, says Iachini.
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) indexand is composed of about 1,000 companies that trade on 20 stock exchanges around the world (notincluding 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.
tool. It allows you to pick different ETFs andadjust 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 howuse the TV in my house -- but it has to make financial sense. So do some investigation before youdecide if simpler really is better.