Skip to main content

ETFs Basics- Asset Allocation Models

By Rick Walter

If you have not reviewed the ETF basics posts, click the ETF Shelter labels and start from the beginning. Remember, as an investor you are purchasing ETF shares in the secondary market. You are not buying creation units or any of that. Of course at some point in time I would like to start an ETF Fund and you are welcome to join my fund, then we can all buy creation units and makes lots of money hedging. However we are not there yet.
Before you choose an ETF , you may want to start with some type of asset allocation model for yourself, which is the practice of dividing resources among different categories based on your risk tolerance, goals and investment horizon; Common classes for asset allocation models are Equities (stocks) , Fixed income (bonds), and Cash and cash equivalents (treasury securities); other classes of assets such as real estate are also included but can be defined in one of the three categories above.

Your asset allocation model should be built based on what you want your portfolio to do: Preservation of Capital, Income, a Balanced Approach, or Growth. Of course your AA Model will be diversified and it will have to be re-balanced from time to time as the market changes. Therefore your AA Model should be based on life questions such as planning for retirement, pending retirement, job promotion, new home purchase, tuition funding, purchasing a business, funding a pension or 401K liability and so forth.

Many investment and planning firms can really get technical and detailed about these categories. For example, each asset class can further be broken down into sectors. For instance, if we had chosen Income with some appreciation for growth then our portfolio based on our asset allocation model for income w/growth may look like this.



In example A, I would start start researching ETFs at the point where I decide to look for stocks in a particular sector, based on my asset allocation model. That's the goal of ETFs. ETFs allows you to target in on specific sectors and industries with precision but does not lock you into the investment with high management fees or penalties if you wanted to sell; ETFs gives you the flexibility you need to adjust or re-balance your portfolio if needed. ETFs gives you the diversification of a mutual fund more efficiently without over-diversifying, and indices that can be used for benchmarking your portfolio performances.

Comments

Popular posts from this blog

ETFs -More training and education

By Rick Walter ETF Training & presentation, education and more... There is so much out there. I went to the iShares website and found a series of educational tools, webinars, web casts , tutorials and presentations that may help a beginner and even experienced investors. I was impressed with the tutorials, but I still think that the financial buzzwords in the presentations may be a bit too complex for beginners. However, the site overall presentation and content is very good! What about taxes? By trade I am a tax professional; I believe that all investments should be analyzed first from a tax position, before an investment decision is made. ETFs are labeled as very tax efficient vehicles. Here is a good article, in my opinion, that explains the tax efficiency issue very well for ETFs. Check our external link section for links to websites that I believe provide top notch information on ETFs, including sponsors, distributors and advisers. I will be adding to the list daily. If th...

ETF update

I have been tracking exchange-traded fund indexes of oil and gas, banking, health and pharma, real estate and commodities but none of these indexes are budging from their lows. Maybe, I am looking at this in the wrong way. A few points here, a few points there- nothing major; The only investors that are possibly making money are the short sellers. If you are good at short selling then this is the market for you. Lets take a look at a good short fund.

New ETF Posting

By UCS Investment Co. The new ETF posting on the AT-ETF Exchange is the PowerShares KBW Property & Casualty Insurance Portfolio (Fund) . The Symbol is KBWP . This is a relatively new fund which opened in December of last year. The Fund is up about 1% so far this year. We are not expecting a huge run up in price in the short-term on this fund but we are looking forward to steady gains in the share price of the fund as the economy improves.