Stock ETFs: Investment Options Based on Portfolio Size - dummies

Stock ETFs: Investment Options Based on Portfolio Size

By Russell Wild

If there were no trading costs involved with ETFs, then you would always be best off to hold separate ETFs for each stock style, i.e. large growth, large value, and so on.

This approach gives you the opportunity to rebalance once a year. But the profit you expect to reap from that tweak must exceed the transaction costs of making two trades (generally selling shares of the outperforming ETF for the year and adding to the underperformer).

If your portfolio isn’t big enough for the profit of the tweaking to outweigh the cost of the trading, you’re better off with a blend of value and growth. If your portfolio is so small that any tweaking is unlikely to be profitable, invest in a blend of everything. Keep these parameters in mind as you read on.

“Everything” investment options

If you have a portfolio of $10,000 or less, you should either be thinking mutual funds (not ETFs), or you should seek to invest at a brokerage that will not charge you for trading 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” domestic stock category include the iShares Dow Jones U.S. Total Market ETF (IYY), the Vanguard Total Stock Market ETF (VTI), and the Schwab U.S. Broad Market ETF (SCHB). Of the three, some investors have a slight preference for the Schwab and the Vanguard choices because of their ultra-low costs (0.06 and 0.07 percent respectively, versus 0.20 percent for the iShares offering).

(Note: There are several “everything” ETFs where you can tap into even broader investments than the entire U.S. stock market.)

Large and small cap blends

If you have more than $10,000 but less than $20,000 or so, and you’re able 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, a professional financial manager would likely recommend 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 Vanguard Mega Cap 300 ETF (MGC), the iShares Russell 1000 ETF (IWB), and the Schwab U.S. Large-Cap ETF (SCHX).

Large cap growth and value options

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), Vanguard Mega Cap Growth ETF (MGK), iShares Morningstar Large Growth ETF (JKE), and the Schwab U.S. Large-Cap Growth ETF (SCHG).