Just as animal and plant life adjust to the seasons, so should investors periodically readjust their portfolios between equities and fixed-income investments. The two ETF ideas we will discuss in this article offer investors a global basket of equities and a fixed-income inflation protector as proxies for a diversified portfolio, which can be rebalanced when one investment outshines the other. (Learn about the ins and outs of managing a profitable ETF portfolio at 3 Steps to a Profitable ETF Portfolio.)
Global ETF Investing Options
Being a citizen of the world is reason enough to take a wider view on all issues, including investments. The SPDRs S&P 500 Index (AMEX:SPY) is one option for investors who are eager to build global portfolios. Even though the index focuses mainly on U.S. companies, approximately 45% of revenue in this ETF is generated overseas.
For a more diversified approach, investors have the Vanguard Total World Stock ETF (NYSE:VT) option. Launched in June 2008, the low 0.25% expense ratio of this ETF as of June 26 makes it worth following. Although 48.8% of the fund was focused on North America, as of October 31, 51% was invested in Europe, the Pacific and emerging markets.
For investors who are hesitant to invest in a new ETF, the Vanguard FTSE All-World ETF (NYSE:VEU) is a good alternative to consider. The VEU ETF had less than 7% of its assets allocated to North America as of June 30. In addition, until volume on the VT ETF increases, the fund could be combined with the SPY for a truly global equity position.
Measures Of Protection
The rising cost of healthcare and the possibility of higher taxes still make inflation a key concern for investors and retirees, even though oil prices have fallen below $60 per barrel. The iShares Lehman U.S. Treasury Inflation Protected Bond Fund (NYSE:TIP) adds a fixed coupon (interest payment) to an inflation index like the Consumer Price Index (CPI).
As consumer prices rise and push the CPI upward, the TIP fund also increases in value, which helps investors keep pace with inflation. The TIP fund has fallen 5.22% for the year through November 13. (Get better acquainted with the Consumer Price Index by reading The Consumer Price Index: A Friend to Investors.)
The allocation between equity and fixed income will vary according to individual risk tolerance and investment goals. For investors with more than five years to spare before the funds are needed, a dollar-cost averaging approach into equities is a viable solution. Investors with less time to handle market volatility should consider overweighting fixed-income investments.
To remove the guesswork, investors should count on rebalancing their portfolios between equities and fixed income on a semi-annual or annual basis. In that way, investors can refocus their portfolios in accordance with the changing seasons of their lives.