It’s fun to bet on niche areas markets and win big, but when constructing a long-term investment portfolio, investors are better off sticking to simple and broad exchange traded funds.
Financial advisors typically recommend crafting an investment portfolio with broad-based index funds to capture a wide and balanced range of stocks at a minimal expense, writes Joanne Cleaver for U.S. News.
For example, David Schneider, president of Schneider Wealth Management and a certified financial planner, advises clients to add broad market exposure, including international stock funds, bond ETFs, small-cap stocks and even real estate investment trusts for added diversification. [Low-Cost, Dividend Stock ETFs for a Successful Retirement Portfolio]
For instance, the Schwab International Equity (NYSEArca: SCHF) is the cheapest international stock ETF on the market, with a 0.08% expense ratio. [Dirt-Cheap International Stock ETFs]
Additionally, investors can track cheap U.S. stock ETFs with something like the iShares Core U.S. Growth ETF (NYSEArca: IUSG), which has a 0.09% expense ratio, or more targeted exposure to small-cap stocks with the Vanguard Small Cap ETF (NYSEArca: VB), which has a 0.09% expense ratio. [Build a Dirt-Cheap Portfolio With These ETFs]
Schneider, though, warns investors to stay away from the latest trends or chase after hot money.
“Just because someone has created a product doesn’t mean you should buy it,” Schneider said in the article. “Playing commodity and currency markets or shorting the stock or bond market through an ETF isn’t investing. It’s gambling.”
Schneider also advises investors to stick to the traditional portfolio allocation with a 65% stock and 35% bond position, and the ratio can change depending on age and risk tolerance.
Chris Cook, president of Beacon Capital Management, also believes investors should start off with broad core positions, but for larger portfolios, investors can stir in sector funds and even real estate exposure.
Specifically, Cook recommends 10 areas that investors can target, including materials, energy, telecom, finance, health care, technology, consumer discretionary, consumer services, industrials, and consumer staples. For broad sector ETF exposure, investors can consider options from State Street Global Advisor’s SPDR suite, Vanguard Group, BlackRock’s iShares and the more recent additions from Fidelity Investments.
“You get exposure to every segment of the market, and they work well together,” Cook said. “If one of these categories takes off, you can manage or track it directly without disturbing the others.”
For example, the Technology Select Sector SPDR (NYSEArca: XLK) and the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) were among two best performing sector ETFs over October. [The Best Sector ETFs for November]
Hugh Anderson, managing director for HighTower Advisors, also agrees on building a portfolio with a solid group of blue-chip index funds. However, for those itching to play the market, Anderson advises clients to utilize smaller positions in individual stocks. Since ETFs trade like a stock, many would be tempted to trade ETFs more often than a mutual funds, which could erode returns due to commission fees.
For more information on investing in ETFs, visit our ETF 101 category.
Max Chen contributed to this article.