The Big Picture For The Week of June 26, 2005

Thanks for all the comments and emails on the Barron's nod, much appreciated.

Some of the feedback reveals that there really is a lack of ETF content that goes beyond an ETF is a basket of stocks that trades through out the day.

There were a couple of emails (or maybe they were comments, it all goes to my email address) asking for my opinion or suggestion for an all ETF portfolio. This is tough one.

First and foremost, if you go through the archives you will see that I have never been a fan of just using ETFs. They are a tool that I clearly think highly of but I also think that for most folks a blend of several types of products is the best way to go. I am talking in general terms here because one size does not fit all.

They biggest drawback I see (this is something I have written many times before) is a lack of dividends. Take utilities for example. In client accounts I own a few different utilities and most of the ones I own for clients yield in the mid to high fours. The three ETFs for this sector yield around 3%. If the people that are calling for below average equity returns for the next few years turn out to be right, an extra 100 or 150 basis points could matter a lot.

I wrote the other day that I use sector ETFs for the accounts where I use ETFs at all (this is a small percentage of our firms accounts). Because of my interest in a heavy foreign weighting I use the global ETFs from iShares for energy and healthcare. I don't use ETFs for anyone for telecom and I prefer stock for utilities but that does not always work out.

I don't think I can suggest an all ETF portfolio because I really don't believe it is the best possible thing an investor can do for themselves. Below is a list, by SPX sector, of how I would construct the equity portion of a portfolio where individual stocks only is not ideal for whatever reason.

Financials: domestic ETF and a foreign bank
Tech: domestic ETF and a high beta name or two
Healthcare: global ETF and a specialty stock
Consumer: staples ETF and discretionary stock
Industrial: ETF and a foreign stock
Energy: global ETF and one stock
Materials: either an ETF or a stock depending on the client
Telecom: no ETF, only stocks
Utilities: my preference here is stock but that does not always work

I always add a stock to financials for yield, foreign exposure and as a way to reduce beta. I also add a stock for consumer discretionary for proper diversification. Energy is another important area, to me, to add a stock. Health, industrial and tech are less important to add a stock than the first three sectors in this paragraph.

For emerging markets I use both ETFs and closed end funds, depending on the client. I do what I can to make use of what is available. This is also why I like to spend time learning about, and writing about, new products and encouraging people to learn more for themselves. A closed end country fund may not be for you but there is no reason to learn about them, as an example. Same thing applies to all of the new products that are coming soon.

One comment referenced a simple two ETF allocation of 58% SPY and 42% EFA by Fisher. I'm not sure if that comment was referring to my old boss Ken Fisher or someone else but like any all ETF portfolio you will read about 58% SPY 42% EFA has pluses and minuses. If simple is a top priority, which is fine, you could easily blend together two or three broad based ETFs, be reasonably diversified and capture most of what is going on in the stock market.

What I have laid out above is my approach with ETFs but this is absolutely a subjective thing and just because I believe in one way doesn't make it right for anyone else.