Exchange-Traded Futures & Options on them

Asset Allocation with ETFs
by ETFZone staff

The importance of asset allocation, or deciding what percentage of a portfolio to devote to various asset classes, cannot be overstated. Investors spend enormous amounts of time and money picking individual stocks, while they spend relatively little deciding what types of stock or bond to their funds. It should be just the opposite.

BETTER RETURNS in Brazil (EWZ) than in SPY (+xxx%) since 2002 / also ILY


Investors should spend most of their time on overall asset selection and ignore individual stocks for the most part. Repeated studies(1) by unbiased university researchers have shown that about 95% of money managers' performance, for better or worse, can be explained by their selection of asset classes, not by their selection of individual stocks. When a stock performs well, invariably stocks from the same asset classes follow in parallel. All one has to do is pick asset classes well to outperform. Asset allocation is not necessarily easy, but it is less detailed and time consuming than stock picking, and it rewards the diligent investor handsomely.

Why is stock picking so unproductive? Most economists feel this is because of the enormous competition in the markets. So many experts are analyzing stocks that there is no public information others have not examined and acted on. Insider information probably would give an advantage but it is, of course, illegal to use for trading. The sheer cost of sifting through information about individual companies raises the hurdle further for stock picking funds to beat the market. One strategy to avoid the crush of competition is to gravitate to lesser-known companies, but this brings with it higher risk. The record clearly shows that on average stock picking funds do not beat the market, and there is no evidence that stock pickers who are initially successful can maintain their edge over time.

Happily, ETFs are the ideal tool for the investor focused on asset allocation. They represent just about every asset class available and are cheap, liquid, and reliable. The primary asset classes in which ETFs are available include:

Large Cap Stocks
Mid Cap Stocks
Small Cap Stocks
Growth Stocks
Value Stocks
Sector Stocks
International Stocks
Country
Emerging Market Stocks
Long-term Bonds
Mid-term Bonds
Short-term Bonds
Real Estate Investment Trusts

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