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Full diversification in ETFs

Jun 22 2010 08:42
How does an interested investor choose the “right” ETF?

That’s a loaded question, because all the usual variables apply: risk profile, investment goal and time horizon.

But here’s a rough rule of thumb based on what’s available.

At the time of writing (late May) there were 23 ETFs listed on the JSE.

Most important for an investor seeking a passive index tracker is what index do you want tracked?

The entire market, Top 40 index or more specific indices, such as resources or financials?

ETFs on the JSE allow for the construction of a well-diversified portfolio.

Specialise, diversify

Main index ETFs could form the core of a portfolio, spiced up at the fringes with sectors the informed investor might have a view on, such as financial shares or a physical commodity like gold.

Other asset classes, such as bonds and property, can be added for contracyclical diversification from equity indices; and offshore diversification is also important.

There’s a range of options here: from broad brush strokes, such as the Morgan Stanley Capital International index, to more specific views, like EuroStoxx 50, the FTSE 100 or Japan.

That could provide a pretty well diversified portfolio just from ETFs.

But it’s probably not ideal for a long-term investor wanting to track markets but perhaps add a little more.

Best advice is probably to work on the 80:20 principle.

Have carefully selected ETFs as the core of the portfolio and add some actively managed funds (unit trusts) to the fringes.

A more adventurous, risk-tolerant investor could switch that 80:20 split the other way and accept the higher costs.

The trick here is choosing the right active manager – but that’s a whole subject on its own.

 - Finweek


etfs  |  invest


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