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ETF Investment Strategies to Reduce Risk, Optimize Return

When you invest in exchange-traded funds (ETFs), you're wise to invest in both large growth and value stocks — separately. That approach gives you the opportunity to rebalance once a year and, by so doing, juice out added return and keep risk to a minimum.

The profit you reap from tweaking your ETFs overall must exceed the transaction costs of making two trades (generally selling the outperforming ETF for the year and purchasing the underperformer).

Investing $10,000 or less

If you have a portfolio of $10,000 or less, you should probably be thinking mutual funds, not ETFs. Otherwise, the trading costs could eat you alive. If, however, you are unlikely to do any trading in the next several years, an ETF portfolio may make sense. In that case, consider a simple and all-encompassing “everything” (total ball of wax) ETF for your domestic stock holdings.

Good options in the “everything” stock category include the iShares Dow Jones U.S. Total Market (IYY), the Vanguard Total Stock Market ETF (VTI), and the streetTRACKS Total Market (TMW). Of the three, you may prefer the Vanguard choice for its ultra-low cost (0.07 percent versus 0.20 percent for either the iShares or the streetTRACKS).

Investing $10,000 to $20,000

If you have more than $10,000 but less than $20,000 or so, and you’re willing to invest it and keep it put for a good while, consider splitting up your domestic stock portfolio into large and small cap.

In this case, you may want a diversified small cap blend and a diversified large cap blend. Good options among the large cap blends would include the Vanguard Large Cap ETF (VV), the iShares S&P 500 (IW), the iShares Russell 1000 (IWB), and possibly the unconventional and somewhat sassy Rydex S&P 500 Equal Weight (RSP) ETF.

Investing more than $20,000

If you have a portfolio of more than $20,000, you should split up the large caps into growth and value. Good large growth options would include the Vanguard Growth ETF (VUG), iShares Morningstar Large Growth (JKE), iShares S&P 500 Growth (IVW), streetTRACKS Dow Jones U.S. Large Cap Growth (ELG), and possibly the Rydex S&P 500 Pure Growth (RPG).

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