Which ETFs do I recommend for different asset classes when putting together that first portfolio? The first move is to decide which asset classes to use. Twenty-five months ago I posted this Asset Allocation blog and little has changed over that time. One error in the table is the position of VEA. That ETF should be included in the Developed International Equities box rather than the Emerging Market asset class. Since posting this asset allocation table I added a Precious Metals asset class to several portfolios. Another change is that I no longer use mid- and small-cap blend (VO and VB) as those asset classes are covered by the value and growth ETFs. This cuts the number of U.S. Equity asset classes from nine to seven. A strong argument can be made that the “Big Nine” (now “Big Seven”) are highly correlated and one only needs VTI to cover all U.S. Equity asset classes. If you want to simplify your portfolio or if it is rather small, use only VTI for U.S. Equities. However, I’ll continue to use VTI, VTV, VOE, VBR, VUG, VOT, and VBK as the primary representative ETFs for the U.S. Equities market.
This material is not available for publication elsewhere on the Internet.
The remaining nine asset classes are: Cash, Domestic Bonds (BND), Developed International Markets (VEU), Emerging Markets (VWO), U.S REITs (VNQ), International REITs (RWX), International Bonds (BWX), Commodities (DBC), and Precious Metals (GTU). While these are the primary ETFs used to calculate the ITA Index benchmark, I hold other ETFs in different portfolios as well as a few individual stocks. For example, I don’t limit bonds to just BND. Other bond and income ETFs include BSV, BIV, AGG, JNK, LQD, TLT, TIP, SHY, etc.
As stated many times on this blog, the second decision of what percentage to allocate to each asset class is the most difficult decision facing investors. If one follows the Momentum-Optimization Model, and you are satisfied with the constraints applied to the different asset classes and individual securities, it is possible to receive help with this difficult decision through the optimizer.
Here is the latest ranking of ETFs I use to populate most of the portfolios tracked here at ITA.