In our educational series on ETFs we have explored 1) what is an ETF, 2) the anatomy of an ETF, and 3) the investment choices in ETFs. In the fourth and last segment of our series we will learn about how to construct an investment portfolio using ETFs.

As ETFs have become a viable investment option and an alternative to owning stocks, bonds and/or mutual funds, more and more investors and financial advisors are using ETFs in their portfolios.

Before you begin the process of choosing ETFs you need to know your investment profile which includes your risk assessment, investment goals, time horizon and tax situation. Once you determine your profile you can choose the strategy. Are you more suited to a buy and hold strategy, an activity managed tactical strategy or a combination on the two?

Once you choose your strategy you can select an asset allocation using ETFs that represent equities (domestic large-cap, medium/small-cap and foreigFinancial concept asset allocation word cloudn), bonds (taxable or tax-free, long or short durations), economic sectors and alternative investments. For asset allocation you can refer back to our segment on investment choices in ETFs. For most buy and hold investors the goal should be to choose several ETFs that are diversified (un-correlatedto each other). For example, an investor with a moderate profile and a long time horizon might built a portfolio using 20% SPDR S&P 500 Index (SPY), 15% Vanguard Total Stock Market (VTI), 10% iShares S&P SmallCap 600 Index (IJR), 15% iShares MSCI-EAFE (EFA), 20% iShares 20+ Year Treasury Bond (TLT) and 20% iShares Barclays 7-10 Year Treasury Bond (IEF). Of course the percentages and ETF choices will vary among different investors.

To purchase the correct percentage you multiply the total amount of your proposed investment by the percentage you want, then divide that number by the current price of the ETF at the time of purchase. For example to get a 20% position of SPY in a $200,000 portfolio you multiply $200,000 x 20% = $40,000, then divide $40,000 by the current price of SPY ($188.01 as of 09/28/2015) = 213 shares (rounded). Be sure to take into account the fees and/or commissions.

If your profile equates to an actively managed or tactically managed portfolio you will need to research the universe of ETFs, have a criteria of selecting the ETFs and adopt a buy and sell discipline. If you don’t have the time for this strategy you should choose an investment advisor who specializes in managing these types of portfolios.

Although the portfolio example shown above would produce interest and dividends be sure to have sufficient cash to meet all short term needs. After you build your ETF portfolio you should review it on a regular basis to find out if the portfolio needs to be re-balanced or re-allocated.

Constructing an ETF portfolio can be simple or complex. It’s important to know the way you construct an ETF portfolio will have a major impact on future results.

We hope our series on ETFs has been helpful. If you have any questions on ETFs or would like to discuss your financial goals with a Worth Asset Management Advisor please contact us by phone or email.

Keep in mind that past performance is not indicative of future results. In addition, there may be other Exchange Traded Products that offer exposure to the sectors mentioned and each has their unique perspectives and characteristics. It is important to determine if they are appropriate for your personal portfolio.

Disclosure: Worth Asset Management is a Registered Investment Adviser with the state of Texas. Jim Clark and/or his clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The comments and opinions offered herein are not personalized recommendations to buy, sell or hold securities.

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