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Investing in ETFs: Core portfolio holdings

Investments » Investing In ETFs: Core Portfolio Holdings

Not so long ago, in 1993, the exchange-traded fund, or ETF, made its debut in the U.S. It was a puny new runt on the investing block, staring up at the behemoth known as the mutual fund.

But ETFs have matured and are now the investment of choice for many people.

ETF assets soared from $161.7 billion in March 2004 to $1.71 trillion in March 2014, according to the Investment Company Institute -- an annual growth rate of about 26 percent. But ETF assets are still dwarfed by mutual funds' $15.23 trillion of assets as of March.

A recent study by Vanguard concludes that investing in ETFs has grown popular due to several factors, including their lower costs and greater trading flexibility when compared with mutual funds.

Bankrate asked five professional money managers to offer their take on core portfolio holdings that all investors should own. Following are their recommendations.

Recommended core ETF portfolio holdings by W. Kirk Taylor, CFP

Know what you own

Taylor likes the above five funds because they create a broadly diversified portfolio which, while not perfectly negatively correlated, contains asset classes "that tend to zig when the others zag," he says.

The key to constructing a portfolio from the ground up is to choose ETFs with broad objectives that do not overlap, he says.

"An ETF that tracks all non-U.S. stocks will typically include exposure to emerging market stocks," he says. "So a separate ETF that tracks emerging market stocks can be used, but it is not necessarily needed."

However, investors need to be aware of what a fund holds. For example, Treasury inflation-protected securities are bonds, but they typically are not found in an aggregate bond index fund. Buying a separate TIPS fund can help diversify the portfolio, he says.

"TIPS as an asset class tend to have low correlation to the bond market as a whole, and will react differently than the aggregate bond index in most years," he says, adding that TIPS also do not tend to be highly correlated to stocks.

Taylor says sticking to the five core funds he recommends offers a broad selection of complementary asset classes. While there is an ocean of different ETF possibilities, novice investors who buy too many funds risk inadvertently tilting their portfolios too heavily in any one direction.

"Too much flexibility can be a bad thing if an investor doesn't fully understand the exposure they may be taking on," he says.

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