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Pursuing Portfolio Balance? A Look at Exchange-Traded Funds

December 4, 2017
Finding portfolio balance: Exchange-traded funds could offer balance between funds and stocks
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Looking to strike a balance between stocks and funds in your portfolio? Since their emergence in the early 1990s, exchange-traded funds (ETFs) have become prominent financial instruments in the investment world. Combining the trading agility of an individual stock with the market breadth of a mutual fund, the ETF strikes a balance between both worlds. 

With a market scope as wide as it is diverse—from sectors, indexes, and commodities, to international and emerging markets, and more—ETFs can provide market selection, diversity of exposure, and ease of trading, which can appeal to today’s digitally empowered do-it-yourself investor. (Brush up on ETF basics here.)

As with any investment, however, it's important to consider transaction costs. Some investors shoot for a combination of low-cost ETFs and commission-free trading. For example, recently, TD Ameritrade essentially tripled its commission free ETF trading program to 296 products offered by 8 leading providers. That's more commission-free ETFs than any firm in the industry.   

ETFs and the DIY Investor: It’s a Balancing Act

So, if you’re a DIY investor who plans on building and managing an ETF portfolio, it can be important to pay attention to portfolio balance. This “balance”—the allocation and weighting of your portfolio’s individual assets—is what collectively embodies your investment strategy’s potential and sets it in motion.

Let’s back up and revisit the definition of a balanced portfolio allocation. Simply put, a balanced portfolio allocation is one whose mix of assets offers an investor an acceptable proportion of risk to reward based on the individual's risk tolerance. Of course, risk/reward will vary among individual investors whose financial objectives, time horizon, capital resources, and risk tolerance differ. So it’s important to note that there’s no such thing as a perfect balance. However, you can aim to achieve a reasonably effective balance that’s appropriate to your particular financial goals and profile.

One guideline is to select ETFs with specific characteristics that match your financial objectives. To do that, answer some basic questions, including:

  • Am I investing for the short term, intermediate term, or long term?
  • Is my investment style more conservative, aggressive, a disproportionate mix of both, or somewhere in between?
  • Given my time horizon, how concentrated (e.g., small sectors) or widespread (e.g., indexes) should my market exposure be?
  • Which ETFs might be appropriate for my time horizon?
  • Should I diversify into different asset classes (e.g., commodity ETFs) or international/emerging markets?
  • How many shares of each ETF should I hold?
  • Is my overall ETF mix highly correlated (potentially moving in the same general direction, whether up or down), or is it diversified to the extent that some ETFs may rise in value as others fall?
  • What are the fees and expenses associated with holding an ETF?
  • How do I compare ETFs that seem similar?
  • What are the trading costs (commissions) to buy and sell ETFs?

Of course, there are plenty of other questions to ask. Managing your own money is an ongoing learning process, and the challenges increase the more knowledge you gain. Just be aware of the risks and make sure you can absorb the losses that naturally come with the territory.

With the right tools, you may be able to shorten your learning curve just a bit. This is where the TD Ameritrade ETF Market Center comes into play.

Tools to Help You Build Your ETF Portfolio

The ETF Market Center provides one of the broadest collections of ETF research tools, third-party market insights/analyses, and ETF products out there. It’s also home to a newly-expanded list of 296 commission-free ETFs. So it provides a wide selection of diversified market products with trading cost savings, all of which are open to virtually any TD Ameritrade client. 

The ETF Market Center gives you access to different market types, categories of exposures, and various market groupings.

So yeah, it’s an important resource for an investor aiming to build a balanced ETF portfolio. The ETF Market Center can help you define your desired scale of market exposure and diversification by:

  • Sector
  • Investment style (from small to large cap, value or growth stocks)
  • Commodity markets
  • Global and emerging markets and
  • Individual stocks (contained in various ETFs)

You can use the ETF Market Center’s fund profile for fundamental or technical research. If you need professional commentary or analysis, you can access third-party commentary. Last but not least, the Market Center’s commission-free ETFs provide you with a wide range of low-cost investment opportunities.

No time or ability to self-direct your investments? Consider managed portfolio solutions. If you need professional assistance, TD Ameritrade has financial consultants available to help you plan your goals. 

Carefully consider the investment objectives, risks, charges and expenses before investing. A prospectus, obtained by calling 800-669-3900, contains this and other important information about an investment company. Read carefully before investing.

Screen Test

Use a screener to narrow the field of ETFs that might best fit your goals at the TD Ameritrade ETFs Market Center. Predefined and custom screens can help you filter through sector funds, target-date funds, bear-market funds, and more.

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