Do you have a core investment strategy that you never waiver from? One that is tried and true in good times and bad. I do. Mine involves 16 holdings with an equal number (four) of micro-, small-, mid- and large-cap stocks. I call it Core Fore Investing and the results from three simulated portfolios between July and November 2009 are impressive. Here we'll provide the lazy man's version (not a bad idea given simplicity and savings), which is four exchange-traded funds. For fun, we'll also pick one stock from each ETF's top holdings.
IN PICTURES: Learn To Invest In 10 Steps
Four ETF Portfolio
|Exchange Traded Fund||YTD Return||3-Year Average Return|
|iShares Russell Microcap Index (NYSE:IWC)||23.04%||-6.74%|
|PowerShares Dynamic Small Cap (NYSE:PJM)||19.62%||-6.32%|
|Claymore/Zacks Mid-Cap Core (NYSE:CZA)||12.90%||0.93%|
|iShares Morningstar Large Core Index (NYSE:JKD)||9.19%||-1.98%|
|Vanguard Total Market ETF (NYSE:VTI)||10.87%||-3.75%|
Two Different Worlds
The table above speaks volumes about the dichotomy in the markets in the past three years. Essentially, we've had one great year in 2009, an average one in 2007 and a terrible one in between. Thankfully, we're on a second consecutive year of strong returns and it's looking good at this point, which is a relief for retirement plans.
For those with ten-plus years until retirement, the Core Fore ETF portfolio will deliver solid returns. Beginner investors with little cash should probably consider Vanguard's Total Stock Market ETF, which tracks the Wilshire 5000. It's the broadest market index in the U.S. and its price reflects the entire U.S. stock market. Once you're comfortable with investing, but still interested in a simple portfolio, move into the four aforementioned ETFs.
Stick To A Plan
The important thing to remember about the Core Fore ETF portfolio is that it's designed to be a pure all-cap play. Few mutual funds or exchange-traded funds calling themselves all-cap or multi-cap actually invest in all four market caps. Most simply load up with large caps and a sprinkling of mid- and small-caps. This is different. At least 85% of each ETF's holdings are invested in the market cap intended by its name. The Core Fore ETF portfolio outperformed the Vanguard Total Stock Market fund by 22 basis points annually over the past three years. Year-to-date, it's not nearly as close, with the Core Fore ETF portfolio besting the Vanguard Total Market ETF by 532 basis points. You can expect more of the same in the months and years to come.
Four Stock Picks
Scanning the top 25 holdings of the iShares Russell Micro Cap ETF, there are a lot of stocks with impressive year-to-date returns. In February, La-Z-Boy (NYSE:LZB) said its third-quarter profit was its fourth consecutive quarter to do so. Both LZB and Ethan Allen (NYSE:ETH) are doing well as the recovery continues.
The next pick is from the PowerShares Dynamic Small Cap and it's an easy one. Tankless water heater manufacturer A.O. Smith (NYSE:AOS) is up 21% since last October, even though it was trading near a 52-week high then. This is a gem of a company with great potential in China and India. It's a definite long-term play.
In the mid-caps, let's look at the Claymore/Zacks Mid-Cap Core ETF. Nothing really stands out, although Scripps Network Interactive (NYSE:SNI) is a good bet. Nonetheless, CNA Financial (NYSE:CNA) has the highest short ratio currently of any property and casualty insurance company (possible short squeeze although unlikely as near 52-week high) and is a core holding of Loews (NYSE:L), another favorite of mine.
Lastly, there is the iShares Morningstar Large Core Index ETF. This too is an easy pick with McDonald's (NYSE:MCD) in the mix, which I consider one of the best run companies in America and whose stock price hasn't done much in the last year and a half.
The Bottom Line
Four stocks against four ETFs is a bit of an unfair competition given the diversification differences. However, the four stocks selected are an extremely strong group and should give the ETFs a run for their money. (For more, check out our Stock Picking Strategies Tutorial.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
Mutual Funds & ETFsLearn about four mutual funds Warren Buffett would invest and recommend to his trustee, and discover detailed analysis of these mutual funds.
Investing BasicsIs there an opportunity in exotic currencies right now, or are you safer sticking to the major ones?
Mutual Funds & ETFsCompare and contrast the rise of America's big three institutional asset managers: BlackRock Funds, The Vanguard Group and State Street Global Advisors.
Stock AnalysisThese three stocks are resilient, fundamentally sound and also pay generous dividends.
ProfessionalsMutual funds are a good choice for emotional investors. Here are five popular funds to consider.
Investing NewsAre stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
Investing NewsHere are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
Investing NewsHere are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
Stock AnalysisIf you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
Mutual Funds & ETFsExplore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
Mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high ... Read Full Answer >>
Financial advisors who operate as fee-only planners charge a percentage, usually 1 to 2%, of a client's net assets. For a ... Read Full Answer >>
Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>