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Amid Uncertainty, It’s OK To Be Boring |

Amid Uncertainty, It’s OK To Be Boring

September 30, 2014

Best Domestic ETF Choices

What ETF best fits one’s core or strategic allocation depends on the strategy objective as well as the established benchmark against which that strategy will be measured. The idea here is to be as benchmark neutral as possible, without introducing an unintended style drift or sector tilt. While fundamentally weighted ETFs can add value at times, under these circumstances, we’re looking more to traditional cap-weighted indices.

Subsequent, but equally important, considerations include ETF trading costs, liquidity, expense ratio and portfolio fit. Given the inherent short-term nature of this position, we at Nottingham tend to favor highly liquid ETFs that can be bought and sold in size with little market impact. Expense ratios, while important, tend to be a secondary consideration due to the relatively short intended time horizon.

For example, a good domestic equity placeholder might be the SPDR S&P 500 ETF (SPY | A-98) or the Vanguard S&P 500 ETF (VOO | A-97). At Nottingham, the best benchmark match for our portfolios tends to be the iShares Core S&P Total US Stock Market ETF (ITOT | A-100),which gives us direct exposure to the S&P 1500 Index, against which we benchmark our domestic allocation.

All three options are highly liquid, usually trading with a 1-2 cent bid/ask spread, available in size and spot very low expense ratios.

International And Fixed-Income Choices

Looking internationally, the Vanguard FTSE All-World ex-US ETF (VEU | B-99) and the iShares MSCI ACWI Ex-US ETF (ACWX | B-98) provide broad exposure that includes developed and emerging market countries, while the iShares MSCI EAFE ETF (EFA | A-91) can provide highly liquid access to strictly developed markets. As with the U.S-focused ETFs mentioned above, all three of these are very liquid, trade in size and have low expense ratios.

Avoiding low-conviction tactical trades can extend to the fixed-income arena as well.

With aggressive valuations in both the high-yield and bank loan space currently, perhaps it makes sense to de-risk a little bit and hide out in something like the iShares Core US Aggregate Bond ETF (AGG | A-97) or the Vanguard Total Bond Market ETF (BND | A-93) for a while.

State Street also has a number of duration-specific ETFs that may match up well with the portfolio’s target duration.


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