ETFs to Solidify Your Portfolio

NEW YORK (TheStreet) -- Improving market conditions appear to have been embraced by the public as once-fearful investors leave behind the shelters they constructed in 2011 and survey the land for upside potential. The "risk-on" mentality is evidenced by the fact that, as we embark into the final week of January 2012, last year's losers have become winners and vice versa.

The shift in preference is encouraging, but it is important to avoid letting confidence transform into complacency. The market may be ratcheting higher on a day-to-day basis. Looking ahead, though, many of the same challenges we have faced in previous months remain unresolved: Europe is in the midst of a crippling debt crisis, China's government is working diligently to buoy growth, and around the globe geopolitical tensions continue to threaten the resilience of this rally.

Building a solid core is crucial to the construction of any well-balanced investing portfolio. With a stable grounding in place, investors can then use small niche positions to accurately reflect their personal risk preference. There are a number of funds ETF investors can turn to in order to create such a core.

Many individuals rely on broad-based domestic equity products like the SPDR S&P 500 ETF ( SPY), the SPDR Dow Jones Industrial Average ETF ( DIA), or the PowerShares QQQ ( QQQ) when building the base for their portfolios. With their wide reach and dedication to large, multi-national companies, these funds tend to exhibit resilience in all types of market conditions.

The ETF universe also boasts a number of products designed to slice broad equity indices into size- and style-specific classes. Used on their own, or paired with one of the broad products highlighted above, a product like the iShares Russell 1000 Value Index Fund ( IWD) or iShares S&P Small Cap 600 Index Fund ( IJR) may help improve upside potential by taking aim at top performing market segments.

Although many have begun to question the longevity of their winning streaks, I still believe that dividend-focused funds like the iShares Dow Jones Select Dividend Index Fund ( DVY), the SPDR S&P Dividend ETF ( SDY) and the iShares High Dividend Equity Fund ( HDY) are worth keeping on the radar. The yields generated by these products will help to offset downturns that may await us as we head further into the 2012.

As with any portfolio-related decision, investors should be fully schooled before diving into any potential core position. Given their wide net approaches, it is not uncommon to find overlap across a number of the funds listed above. Over-concentration can lead to hiccups down the road and, therefore, should be monitored closely.

Short-term minded aggressive traders may be adequately suited to sway with market fluctuations. Long-term investors, on the other hand, should be taking steps to ensure that present-day emotions don't interfere with potential future performance. After watching the market rally, for example, many may be tempted to pile into risk in hopes of recovering lost ground. In actuality, however, those preparing for the long haul should be on the lookout for products that will hold up well in the event that fears crop up and the markets run into trouble.

Written by Don Dion in Williamstown, Mass.

RELATED ARTICLES:


At the time of publication, Dion Money Management owned the SPDR Dow Jones Industrial Average ETF, iShares Dow Jones Select Dividend Index Fund, PowerShares QQQ and iShares Russell 1000 Value Index Fund.

More from ETFs

Why Millennials Are Ditching Stocks for ETFs

Why Millennials Are Ditching Stocks for ETFs

60 Seconds: What's the Difference Between an ETF and a Mutual Fund?

60 Seconds: What's the Difference Between an ETF and a Mutual Fund?

Video: Why Shark Tank Star Kevin O'Leary Is Doubling Down on Internet Stocks

Video: Why Shark Tank Star Kevin O'Leary Is Doubling Down on Internet Stocks

Simple Investing Strategies Stand the Test of Time

Simple Investing Strategies Stand the Test of Time

This Technology ETF Could Be Signaling a Looming Tech Stock Rout

This Technology ETF Could Be Signaling a Looming Tech Stock Rout