Eight Rules For ETF Success
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Eight Essential Tips for ETF Success
Managing a global portfolio of exchange-traded funds (ETFs) is a smart way to diversify and gain international equity exposure. You don’t need to be an expert, but missing key guidelines can lead to trouble. Follow these eight tips for a more secure investment experience.
1. Prioritize Liquidity
Before diving into ETF investments, secure six months of income in a rainy-day fund. Consider money market funds or U.S. Treasury securities. This buffer provides peace of mind and encourages more creative portfolio strategies.
2. Separate Your Portfolios
Distinguish between a core conservative portfolio and growth portfolios. Focus on capital preservation with your core investments. Use growth portfolios for more speculative investments aimed at capital appreciation.
3. Truly Diversify
Ensure your investments hedge against each other by holding a variety of assets. This isn't just about different ETF sectors or sizes. Consider investing across different currencies and commodities to offset potential market changes.
For example, invest in Swiss, Australian, or Singapore ETFs if the U.S. dollar weakens. Hedge against inflation with assets like gold or Treasury inflation-protected bonds (TIPs). Spread risk sensibly, keeping any single ETF at only 5%-10% of your core portfolio.
4. Choose Countries Wisely
Avoid overexposure to any one country or region by considering factors like:
1. Political and corporate governance stability.
2. Legal systems and contract respect.
3. Macroeconomic conditions, fiscal health, and currency strength.
4. Political risks affecting financial markets.
Assess both the quality and valuation of a country’s stock market. Sometimes, the best opportunities arise from markets that are temporarily down but poised for recovery. Long-term investors might explore annuities tailored for ETF portfolios.
5. Minimize Company Risk
Adopt a “buy countries, not stocks” strategy. Instead of selecting individual stocks, spread risk by choosing ETFs like the iShares MSCI Japan Index, which includes a broad range of companies tracked by the Nikkei 225.
6. Evaluate Country and Company Exposure
Investigate where your ETF investments are allocated. For instance, the iShares MSCI Emerging Markets ETF covers 26 countries, but half your investment might focus on just four: South Korea, South Africa, Taiwan, and China. Similarly, the MSCI Europe, Asia, and Far East index heavily favors Japan and the UK, despite encompassing 21 nations.
Country-specific ETFs can also be concentrated. For example, the iShares FTSE/Xinhua China 25 Index, while diverse, is heavily weighted toward its top five companies.
7. Implement a Trailing Stop-Loss Policy
Avoid unnecessary losses by setting a rule: sell any position that drops more than 20% from its peak. Consider purchasing put options on ETFs with significant downside risk as an insurance policy.
8. Rebalance Regularly
Rebalance at least annually to avoid excessive exposure to high-risk areas. Sell some of your successful investments and reinvest in underperformers. This helps lock in gains and reduce portfolio volatility?"especially critical in emerging markets.
Using low-cost, tax-efficient ETFs is wise, but keep actively managing them. For more guidance, call 877-221-1496.
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