Asset Allocation

How to choose the right set of ETF for your portfolio?

Asset Allocation
Asset Allocation

More than a quarter of all ETFs are US equity based. They range from broad-based, total market index offerings to ETFs narrowly focused on, for example, only companies involved in supplying wind power.

Generally three factors play a role in the selection methodology: size of companies (large, small, etc.), style of investment (growth, value, dividend paying, etc.), and sector of the companies (financial companies, transportation companies, etc.).

The primary mechanism through which most equity ETFs are differentiated is by company coverage in terms of size, style, or sector, but within those categories, further distinctions—and performance differences—arise from differences in weighting schemes.

Broadly, the three basic weighting schemes are cap weighting, equal weighting, and “other.”

International equities, with 434 US-listed funds and almost a quarter of the total assets under management, are the most popular type of ETF.

Fixed-income ETFs allow investors to access institutional-level bond portfolios at a scale and cost that were unimaginable at the turn of the 21st century.

Above and beyond these ETF construction issues, the most critical thing to understand about bond ETFs is that, like bond mutual funds,  their behavior differs greatly from that of single bonds.

Because portfolios never mature, the only way to value them is by using the market price for each of the bonds held. Thus, bond funds do not offer principal protection in the way that single bonds can: We are not guaranteed to get our money back at a fixed point in the future.