Friday, April 20, 2007

Exchange Traded Funds

Motley Fool has a nice recap of the Wall Street Journal front page article of Thursday the 19th that discussed ETF's. Exchange traded funds are really skyrocketing in popularity, and the number of ETF's available is rapidly increasing. So much so that indexing patriarch John Bogle has had some very choice words for this growing industry (also a growing thread to Vanguard!).

For me, the bottom line is this: I believe that a core group of index funds is the right start for your portfolio. I own SPY, DVY, RSP, VTI, and FXI. I also own VFINX, which obviously is redundant since I also own SPY. I have not added much to this pile recently, as I've been investing much more in Small Caps. But I encourage anyone starting out to own some index funds. They are safe core holdings that are not expensive to own.

With all of that being said, I am not sure I necessarily need to own many more of these ETF's. There's one coming out that's going to own companies with high customer loyalty. Please do not mistake owning one of these for being diversified. Owning the Vanguard Total Stock Market Index is diversification - the rest of these super-specialized ETF's feel a bit gimmicky to me.

One note on RSP - this has been a wonderful holding for me. Perhaps I'm killing my diversification by holding it along with SPY, but I do not care. This fund owns all of the companies in the S&P 500, but without respect to market capitalization. It owns an equal amount of each company. I would argue that this will have your portfolio even more diversified than if you held SPY.

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