More financial advisors are abandoning stock-picking in favor of index-tracking ETFs that let them build diversified portfolios for clients with low fees and transparency.
As witnessed in the mutual fund industry, individual stock picking is falling on hard times, with a growing number of top-notch managers fallingshort of benchmark indices. Meanwhile, the growing number of exchange traded fund products available has allowed investors to take on solid, diversified asset allocation strategies.
“The more asset classes that you introduce into a portfolio, the less risk and the better the return you’ll have over a long period of time,” Ron Vinder, financial advisor at UBS Financial Services, who relies almost entirely on ETFs, said in a Barron’s article. [Multi-Asset ETFs]
Since most ETFs passively tracks a benchmark index, Vinder’s approach is passive in nature.
“My whole investment philosophy is coming up with the right strategy and sticking to it,” Vinder added.
Similarly, at ETF Trends, we follow the 200-day exponential moving average to help determine when we are in or out of a position. This way, it helps us adhere to a guideline to methodically execute trades, without relying on any gut feelings. We often use ETFs for portfolio building blocks. [An ETF Trend-Following Plan for All Seasons]
“Whenever an asset class does well, that’s when individuals want to buy more,” Vinder said. “And they want to sell what’s doing poorly.”
Vinder points out that bad timing, coupled with high management fees and inefficient tax planning, drags down portfolio returns below that of the S&P 500.
Within a diversified portfolio, the asset manager includes exposure to traditional oversea assets through funds like the iShares MSCI EAFE (NYSEArca: EFA). Emerging market exposure may be accessed through the iShares MSCI Emerging Markets (NYSEArca: EEM) or the Vanguard MSCI Emerging Markets (NYSEArca: VWO). Bond holdings include options like the PowerShares National Muni Bonds (NYSEArca: PZA), iShares iBoxx $ Investment Grade Corporate Bond (NYSEArca: LQD) and the SPDR Barclays Capital High Yield Bond Index (NYSEArca: JNK).
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.