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.
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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.)
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