ETF Expert

"Stunningly wrong," is how Mr. Updegrave characterized it. After all, in the nearly 30 years that followed the cover, the S&P 500 has annualized roughly 12%. What’s more, investors achieved 12% through 5 recessions (counting the current one) as well as an epic 2000-2002 bear and numerous stock market sell-offs.

It follows that the recent wave of magazine features on the "dos" and "do-not-dos" of ETF investing is worthy of a write-up. After all, when financial magazines preach… well… you might want to maintain a healthy dose of skepticism.

(Business Week gave us "The Death of Equities." Smart Money’s March 2000 cover gave us "15 Great Tech Stocks" in what they dubbed the "Ultimate Tech Portfolio." That’s down more than 85%… 8 years later. Trust me when I say, Wall Street’s elite media will fail to mention just how "wrong" they can get it.)

So what concerns me? I am troubled by the overly simplistic approach that Money Magazine has to ETF investing. (Mr. Updegrave… these are your peers at Money here in 2008!)

For starters, senior writer Penelope Wang has accurately pointed out the rising costs and increasing complexity of exchange-traded funds. And, in fact, I agree that too many providers are providing "products for product sake."

However, ETFs still offer the low cost of index mutual funds and the trading flexibility of individual stocks, bonds, currencies and commodities. And Money’s answer to the 1000+ ETFs in existence is… ignore all but 5?

5 ETFs for all your worries… 4 from Vanguard. (I wonder which fund company is the biggest advertiser in the pages and on the web portals for Money?)

Here is Money’s recommended cure-all:

1. Vanguard Total Stock Market (VTI) 30%
2. Vanguard FTSE All-World excl U.S. (VEU) 20%
3. Vanguard Total Bond Market (BND) 30%
4. Vanguard Real Estate Inv Trust (VNQ) 10%
5. iShares Lehman TIPS Bond Fund (TIP) 10%

I have written about… and supported… each of the above 5 possibilities individually. Nevertheless, I believe it is too simplistic to buy-n-hold-n-hope with these 5 alone. Portfolios should be dynamic enough to respond to changing circumstances. Moreover, most portfolios need to consider a wider range of investments and a greater number of them.

(The claim made in today’s Money feature is that a 50% stock/50% income portfolio can cure all of your ills. Note that, just last month, Money was touting a 75%-80% exposure to stock for investors with a 10-year time horizon.)

Allocation percentages aside, let’s consider the fact that the Money fails to identify two of the most powerful forces in diversification: foreign bonds and commodities. For foreign bonds, one could use the SPDR Lehman International Treasury Bond ETF (BWX) and for commodities, one could employ the services of the Dow Jones AIG Total Commodity Index (DJP).

And why should an equity investor be relegated to market-cap weighted indexes alone? Specifically, both Vanguard Total Market (VTI) and Vanguard All-World (VEU) have precious little weight in the small- and mid-sized companies across the U.S. or abroad. It follows that iShares Small Value (IWN) could help on the domestic front, whereas WisdomTree International Small Cap Dividend (DLS) could bolster the international picture.

Although I do not recommend all-purpose/never-change portfolios, Money should have given its readers something more. Consider the following:

1. SPDR S&P 500 Trust (SPY) 15%
2. iShares Small Value (IWN) 15%
3. Vanguard FTSE All-World excl U.S. (VEU) 15%
4. WisdomTree International Small Cap Dividend (DLS) 15%
5. Vanguard Total Bond Market (BND) 10%
6. SPDR Lehman International Treasury Bond ETF (BWX) 10%
7. Dow Jones AIG Total Commodity Index (DJP) 10%
8. Vanguard Real Estate Inv Trust (VNQ) 5%
9. iShares Lehman TIPS Bond Fund (TIP) 5%

Does this involve a bit more sophistication? Yes. Yet I think the readers of Money deserve the opportunity to increase performance while simultaneously lowering risk through genuine diversification.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.