Traditionally, financial planners and advisors have recommended that one use their age as a benchmark to gauge how much risk should be in their portfolios.  However, Jan Alexander of Forbes states that times have changed and the rules of diversification and risk-taking have followed suit.

In order to mitigate some risks and maximize the performance of a portfolio, she offers several helpful strategies:

• Do what the Ivy League School Endowments do.  Stay diversified by allocating 15%-30% of a portfolio to the following five categories: U.S. stocks, foreign stocks, bonds, commodities and real estate investment trusts (REITs).

• Use ETFs. They can help you accomplish your goals of diversification. They also offer low costs, transparency, tax efficiency and intraday trading ability.

• The dividend strategy. Choose stocks and ETFs that pay dividends.  The reason behind this is that dividends don’t fluctuate like earnings do and it enables one to more accurately forecast the performance of a portfolio.

• Look at emerging markets. Many investors have already sought out Brazil, Russia, China and India, known as the BRIC nations, because of  their economic growth and prosperity.  A good way to access the BRICs is through the use of the iShares MSCI BRIC Index (NYSEArca: BKF), which is up 67.5% year-to-date.

• Check out short-term bonds. Aas the economy recovers, interest rates will increase and the value of a bond purchased today will lose value.  A good way to do this is through the iShares Barclays 1-3 Year Treasury Bond (NYSEArca: SHY), which is up 0.4% year-to-date and has a yield of 2.85%.

• Consider alternative assets, such as commodities and currencies. As emerging markets continue to prosper, raw materials and resources will continue to be in demand. Alternative asset classes are an essential part of a well-balanced portfolio.  A good way to grab exposure to the broad based commodity markets is through the iShares GSCI Commodity-Indexed Trust (NYSEArca: GSG), which is up 0.3% year-to-date.

In addition to considering these strategies, the most important strategy you can use is one that gets you into the markets in time for any potential long-term uptrend and has you out with a stop loss to protect yourself on the downside. You can read more about the strategy we use in The ETF Trend Following Playbook.

For more stories on strategy, visit our trend following category.

Kevin Grewal contributed to this article.

Although there are various ways to diversify, Roger Nusbaum, a contributor at TheStreet, follows a Mohammed El-Erian type portfolio with allocations in equity, bonds and real assets. El-Erian is the CEO and co-CIO of PIMCO.

Nusbaum took a look at ETF choices that fit in with El-Erian’s concept:

In the equity portion, he suggests allocating 10% to the PowerShares S&P 500 Buy Write Portfolio (PBP) and 5% to the iShares S&P 600 Small Cap ETF (IJR) which enables investors to benefit from fact that small-cap stocks generally lead the way in the early stages of a stock market cycle.

Additionally, he suggests allocating 10% of a portfolio to the WisdomTree International Large Cap Dividend ETF (DOL) and 5% to the SPDR S&P International Small Cap Index Fund (GWX). In regard to gaining access to emerging markets, Nusbaum suggests looking at the PowerShares BLDRS Emerging Market 50 Index Fund (ADRE).

Next, he suggests adding fixed-income ETFs to a portfolio. In this portion, he states one should look at the iShares Barclays Agency Fund (AGZ) or iShares S&P/Citigroup 1-3 Year International Treas (SHY). PIMCO also offers a PIMCO 1-3 Year U.S. Treasury Index Fund (TUZ).

To wrap up fixed income, he suggests the use of iShares S&P Citigroup International Treasury (IGOV).

In regard to real assets, Nusbaum suggests utilizing the WisdomTree International Real Estate ETF (DRW) the SPDR Gold Trust (GLD) and the PowerShares DB Agriculture Fund (DBA). Additionally, he suggests gaining exposure to infrastructure through the iShares S&P Global Infrastructure Fund (IGF).

Lastly, he states that one should allocate 8% to special opportunities like the PowerShares Water Portfolio (PHO).

In addition to this, we suggest that one utilize a strategy when investing, such as monitoring market trends using the 200-day moving average.  More on the trend following strategy can be found in our new book.

For more stories on portfolio construction and the use of ETFs, visit our ETF education category.

Kevin Grewal contributed to this article.

The National Association of Realtors said that May sales of existing homes rose by 2.4%. This is the third monthly increase this year, but a bit short of the 2.8% increase expected by analysts. This is promising news, but investors are still wary of a complete housing recovery because of the plunge in prices of existing homes; prices dropped a whopping 16.8% to a median price of $173,000. The news sent the iShares Dow Jones U.S. Real Estate (IYR) up nearly 0.5% in morning trading.

Further uncertainty of the fate of the markets has been brought on by today’s start of a two-day monetary policy meeting held by the Federal Reserve. The Fed is expected to keep key interest rates at or near zero and contemplate over whether or not to raise rates in the near future to curb inflation.

Another cause of caution has been stirred up by the Treasury Department’s auction of $60 billion in two-year notes. In order for the government to continue financing its bailout and stimulus programs, demand for Treasury notes needs to stay strong and yields cannot skyrocket. The iShares Barclays 1-3 Yr Treasury Bd (SHY) is up about 0.1% in morning trading.

On a different note, the aerospace and defense sector took a blow as Boeing (BA) announced that the initial test flight of its much-anticipated 787 jetliner will be delayed, citing a need to reinforce part of the aircraft. As a result, Boeing said that it will not announce when it expects the test flight to take place or for deliveries of the plane to take place for several weeks to come. The news sent the PowerShares Aerospace & Defense (PPA) down about 2% in morning trading; BA is 7.3%.

The volatility of crude oil continues to linger around the industry. Continued uncertainty of the global economy and demand for black gold were offset by the weak U.S. dollar, which drew some speculators back to commodities, but not by much. Crude continued to slide and fell below $67/barrel on the New York Mercantile Exchange. Despite this decline, the US Oil Fund (USO) gained nearly 0.2% in intraday trading.

As many consumers think twice about spending an extra dollar, thrifty measures have lead to many home-cooked meals and families eating dinner at the dinner table as opposed to being waited on at a restaurant. This trend has been beneficial for grocers such as Kroger Co. (KR), which posted a gain in first-quarter profits of 12.7%, or $0.66/share. The Cincinnati-based company beat Wall Street’s expectations and affirmed its full-year earnings guidance of $2 to $2.05/share. Despite the stellar performance, the Retail HOLDRs (RTH) was down 1% in morning trading; KR is 4.3%.

By mid-morning, all three major U.S. indexes were trading in negative territory. The Dow Jones Industrial Average is down nearly 0.5%, the S&P 500 dropped nearly 0.4% and the Nasdaq declined about 0.6%.

For more stories on Real Estate, visit our real estate category.

Kevin Grewal contributed to this article.

PIMCO is the leader in fixed-income management, so it’s fitting that their first offering  is the PIMCO 1-3 Year U.S. Treasury Index Fund (TUZ), which focuses on low-yielding short-term Treasuries. The fund will track the return of the Merrill Lynch 1-3 Year U.S. Treasury Index. The launch is especially exciting, because it’s going to go head-to-head with the grandfather of Treasury ETFs, iShares Barclays 1-3 Year Treasury Bond (SHY).

But PIMCO has also filed for six more ETFs that will cover longer-dated Treasuries and Treasury Inflated Protected Securities (TIPS). PIMCO hopes to utilize its expertise in the bond market to design ETFs that are easier to use for market makers than other types of bond ETFs, states Ian Salisbury for Dow Jones Newswires.

We caught up with Don Suskind, product manager at PIMCO, and Tammie Arnold, managing director, who shared their thoughts with us on being a new ETF market player and where they’re going from here.

PIMCO felt the time was right to get into ETFs after looking at the variety of other vehicles the firm offers, from mutual funds to closed end funds. “ETFs are a natural extension,” Suskind says. “It was a pretty natural continuation of what we’re doing.”

Many have heralded PIMCO’s entry into the ETF space as a turning point for the industry – that such a major mutual fund player would jump on board, some think, may naturally lead to other mutual fund giants embracing ETFs, as well. But Suskind is taking a wait-and-see approach as to how the industry responds.

“It remains to be seen. We hope to do well, and to do that, we’re attempting to design products that will function well with market making and liquidity considerations.”

Arnold says, “What we hope is that we can bring a different perspective, and our expertise, as a positive factor.”

PIMCO’s prominence and expertise as a bond manager could potentially set them apart in the long run. “Because we’re an active manager and trading in bond markets throughout the day, our insight into bond pricing and availability is strong. That puts PIMCO in a slightly different category,” Suskind notes.

The response from the industry and investors so far seems to have been positive, Arnold and Suskind note. It all boils down to having more choices, and delivering them in a convenient vehicle like ETFs. “For all the reasons people appreciate ETFs, they appreciate having the expertise in fixed income management,” says Suskind.

In addition to the filing for six funds, exemptive relief for actively managed ETFs based on currencies, commodities, equities and asset allocation has also been filed.

The ETFs will include the following:

• an ETF that will track the 3-7 Year U.S. Treasury Indexes
• an ETF that will track the 7-15 Year U.S. Treasury Indexes
• an ETF that will track the 15+ Year U.S. Treasury market
• a Broad U.S. TIPS Index
• a Short Maturity U.S. TIPS Index
• a Long Maturity U.S. TIPS Index

Kevin Grewal contributed to this article.

The yield margins of high-yield bonds over Treasuries are narrowing, as seen on the Merrill Lynch U.S. High Yield Master II index, which shrunk from more than 2.1% in February to 1.2% last Thursday, reports Tom Sullivan for Barron’s.

Demand for these junk bonds have been on the rise and the best performers were in health care and utilities. It is thought that the reason for the rally is that traditional high-yield investors never left the market but stuck it through the toughest of times.

Investors have looked to the riskier single-B securities from the double-B-rated issues. Time will tell if people will be interested in the even more riskier triple-C-rated bonds.

• State Street’s SPDR Lehman High Yield Bond (JNK): up 12.2% year-to-date; 13.6% yield
• iShares iBOXX $High Yield Corporate Bond (HYG): up 5.7% year-to-date; 11% yield
• PowerShares High Yield Corporate Bond (PHB): up 5.4% year-to-date; 11.5% yield

In other bond news:

In California, there is a budget gap of $21.3 billion. The state will cut $5.5 billion soon and a further fill the $26 billion hole over the next two years. The California general-obligation bonds were hovering around 1.5% last Friday.

• iShares S&P California Muni Bond Fund (CMF): up 4.3% year-to-date; 3.6% yield

The Treasury’s two-year note dropped to 0.85% last Friday. The 10-year yield closed at 3.43%. A major concern was over the outlook of a weaker dollar and the potential change in country’s debt rating by the S&P.

• iShares Lehman 1-3 Year Treasury Bond Fund ETF (SHY): down 0.3% year-to-date; 3.3% yield
• iShares Lehman 7-10 Year Treasury Bond Fund ETF (IEF): down 7.7% year-to-date; 3.9% yield

Max Chen contributed to this article.

One such haven that has seen a surge is the Treasury market.  The U.S. Treasury Department auctioned $40 billion in 2-year notes on Monday, followed by $35 billion in 5-year notes on Tuesday and $26 billion in 7-year notes on Wednesday, reports Ben Rooney of CNN Money.

This is a whopping $101 billion in Treasuries that are set to sell in one week, in addition to the $57 billion in Treasury bills expected to be sold.  To make these numbers even more eye opening, the May refunding will hit next week, where the Treasury expected to sell another $200 billion in Treasury notes and bonds.

To top it all off, some analysts even said that the Treasury would announce plans to launch and offer a 50-year bond, which would be the longest maturity ever issued by the United States, states Deborah Levine of Market Watch.  This just a rumor that has been floating around Wall Street and many believe that the Treasury will just sell more of its 30-year bonds.

This is all fine and dandy as long as the demand for U.S. debt remains robust. Some strategists fear that the federal government is going to flood the market with excess supply forcing prices to plummet.  Others believe that the Treasury market is in a bubble and as economies recover interest rates will most likely increase causing a burst in the bubble.  Short-term Treasury bills are generally one of the safest investment tools, which is why investors scurry to them whenever they’re unsure.

If you want to grab exposure to the bond market, we think that ETFs are the way to go.  After all, there are about 15 different ETFs with holdings in U.S. Treasuries.

• iShares Lehman 7-10 Yr Treasury Bond Fund (IEF): down 3.4% year-to-date; yields 3.7%

• iShares Lehman TIPS Bond Fund (TIP): up 2.6% year-to-date; yields 3.5%

Kevin Grewal contributed to this article.

Over the past few years, one of the strongest mutual fund companies, American Funds (AIVSX), has seen a loss of $14.4 billion in net redemptions.  Additionally, Fidelity’s Contrafund (FCNTX) has shed about $4.5 billion in net redemptions since June of 2006.  What’s causing this outflow, and where are these assets going?

One reason for the huge jump in redemptions is that baby boomers are taking out more assets than the younger generation is contributing.  In the 1980s and 1990s, baby boomers were putting in more money into the market than anyone was taking out, states Max Rottersman of ETF Guide.  For example, when many baby boomers started contributing to their 401(k) plans, they started with $10,000 and now they are cashing in on these plans which are worth north of $100,000.  This means to break even, a fund would need at least 10 new investors for every retiring shareholder.

To add fuel to the fire, many investors are shunning away from mutual funds and are looking at ETFs.  Over the first nine months of 2008, net inflows of $104 billion have been seen in the ETF market.  Many investors are getting smarter and are looking for options with lower expense ratios, higher tax efficiency, more diversification and transparency- all characteristics of ETFs.

Some ETFs that have benefited from this outflow of assets from the mutual fund world are:

• iShares Barclays TIPS Bond (TIP), which has about $10 billion in assets
• iShares Barclays 1-3 Yr Treasury Bond (SHY), which has about $7 billion in assets
• United States Oil (USO), which has about $4 billion in assets

When choosing an ETF, remember to always look under the hood, watch the trend lines, look long term and keep your risk appetite in mind.

Index Universe reports that over the past year and a half, the world’s credit crisis has spread to stocks, and a number of options have come to market for ETF investors. Those looking for short-term bond ETFs can now find several different portfolios to choose from. They’re an attractive tool for investors who simply want to stay on the short side of the duration curve in order to avoid the threat of rising interest rates.

While there is not a lot of history or back-testing available for most of these ETFs, with less than a year of trading under their belts, there are other in-depth perspectives to take on them and see if they work for your portfolio or investment objectives.

• iShares Barclays 1-3 Year Treasury Bond Fund (SHY): This fund is the oldest, launching in July 2002. The portfolio consists entirely of Treasury notes and had more than 40 holdings at the end of 2008. The expense ratio is 0.15%, and was up 6.6% in 2008.

• Vanguard Short-Term Bond Fund (BSV): This is the largest fund in the category. It holds a mix of government, corporate and international-dollar denominated debt. Government or agency debt is nearly 70% of the portfolio. Its expense ratio is 0.11%.

• Claymore US Capital Markets Micro-Term Fixed Income ETF (ULQ): Launched in February 2008 and covers money market and micro-term fixed-income securities. The expense ratio is 0.27%.

• PowerShares Active Low Duration Fund (PLK): The portfolio consists mainly of U.S. government, corporate and agency debt and has 21 holdings. Its expense ratio is 0.29% and tends to pay out higher interest rates.

• WisdomTree U.S. Current Income Fund (USY): Invests primarily in short-term, investment-grade debt, and charges a 0.25% expense ratio.

Fixed income ETFs offer investors cheap, liquid and transparent exposure to the bond market. Dan Burrows for SmartMoney notes four types that are of particular interest these days:

• High-grade corporate debt: Corporations are hungry for extra cash, and the environment is issuer-friendly right now; note the high exposure to financials in some funds.
• High-yield corporate debt: The big yields are attractive for investors, but in a “bankruptcy watch” environment, this could be more risk that some investors might be able to stomach. We could see defaults in some corporations.
• Treasury bonds and municipal bonds: Treasuries are considered the safest of bond types, while muni bonds have a higher risk of default. Stick to high-quality, general obligation bonds, where the default rate is generally lower.

Sophia Grene for The Financial Times reports that in 2008, global assets under management in fixed income ETFs almost doubled, jumping to $104 billion from $59.9 billion; the first months of 2009 added another $2.7 billion.

Because of the popularity of the fixed income ETF, there has been a  trend toward many providers offering a range of these products. Barclays Global Investors has taken advantage of the enthusiasm and added five funds to its fixed income range. It has taken a longer time to build up the fixed income range of ETFs, mostly because of  the lure of the equity heavyweights. The proportion will start to even out as time goes on, especially now that the equity stocks are in intensive care.

There is still work to be done on the bond indexes, as the main problem with fixed income ETFs is that bond indexes are not well constructed for the purpose. The index provider has to decide which best represents the value of the company’s debt.

So far in the United States, synthetic replication would take ETFs out of the regulated space, so broad indexes are usually replicated by sampling. An index might contain more than 20,000 bonds, but the ETF could track it holding just 120 issues.

• Vanguard Total Bond Market (BND): down 3.9% year-to-date; yields 4.62%

• iShares Barclays 1-3 Year Treasury Bond (SHY): down 0.9% year-to-date; yields 3.43%

Total spending is $317.2 billion. Across the sectors, which are some of the ETFs that could be reaping some rewards as the money kicks in? Whatever happens with these ETFs in the coming months, be sure to follow the trends and have an entry (and exit) strategy. We don’t get in until a fund is above its long-term trend line (the 200-day moving average).

The following sector rundown includes spending provisions of the bill, not tax provisions, according to CNN Politics.

• Transportation, housing and urban development; $57.1 billion iShares Dow Jones U.S. Real Estate Index Fund (IYR): down 13.3% over three months; down 20.3% over one month.

• iShares Dow Jones Transportation (IYT): down 19.2% in the last three months, down 8% in the last week.

• Federal and State Government; $45.472 billion iShares S&P National Municipal Bond Fund (MUB): up 0.5% over three months; up 0.02% in one week.

• Commerce, Justice and Science; $17.842 billion Biotechnology HOLDRs (BBH): up 4.1% over three months; up 0.1% over the last 1 week.

• Defense and Security; $16.4 billion PowerShares Aerospace and Defense (PPA): up 5.6% over three months; down 3.0% over one week.

• Agriculture and Rural Development; $15,986 billion PowerShares DB Agriculture (DBA): down 5.2% over three months; down 6.3% over one week.

• Energy and Environment; $98,234 billion Market Vectors Global Alternative Energy (GEX): down 0.3% over three months; down 8% over one week.

• Labor, Health and Education; $66.15 billion Health Care Select Sector SPDR (XLV): up 4.2% over three months; down 2% over one week.