ETFs are a viable way to gain exposure to particular markets and sectors without having to pick individual names. Some investors scorn ETFs, believing that passive management vehicles interfere with genuine price discovery and could represent a systemic risk to the financial system. However, there is no evidence that the ETF boom over the past 10-15 years has caused increased covariance among individual securities. So long as a small portion of funds remain actively managed (~20%) there is relatively little risk that a market drop will be exacerbated as a consequence of “too much” being invested into ETFs. Below are five strategies on the WhoTrades Marketplace that make the use of ETFs for a portion (or entirety) of their portfolios: Strategy #1 This portfolio consists of five ETFs all close to being equally weighted, ranging from 17.0% to 23.3% allocations. Investments include VOO (S&P 500 ETF), ONEQ (NASDAQ ETF), VTI (97% US stocks, across all market caps), VFH (financials), and VAW (materials). (Source: Strategy #1) These five ETFs alone provide exposure to approximately 3,000 stocks (there is some overlap among them). For someone who has a multi-decade time horizon, yet doesn’t want the burden of stock picking or the additional volatility that can come from a concentrated portfolio, one that diversifies among the highest-returning asset class can produce strong returns over the long-run. Strategy #2 Another strategy is to take a hybrid approach. This trader diversifies through ETFs for a large portion of the portfolio and through a large conglomerate like Berkshire Hathaway (BRK.B) (top allocation at 31.0% of the portfolio), while mostly picking stocks of interest throughout the remainder. (Source: Strategy #2) Over the past year, the total drawdown has been limited to under 3%. It also provides a fairly even mix between value (e.g., VNQ, XOM, WMT) and growth (e.g., COST, AMZN, QQQ). Strategy #3 Similarly, this portfolio takes a concentrated investment in a stock it likes (FB) and largely puts the rest of the portfolio in ETFs outside of a 9.9% allocation to AAPL and smaller bets on UA and F. (Source: Strategy #3) This trader takes both sector-level allocations dedicated toward growth (XLK (tech), XLV (healthcare)), which comprise approximately 30% of the portfolio, with a smaller amount invested in consumer discretionary (XLY), perhaps to take advantage of strong global economic conditions. A small amount of exposure is also provided to small caps (VB; 8.5% of portfolio). Small caps can be used to further juice returns, as these companies on aggregate tend to outperform large-cap indices when considered over longer periods of time, given investors demand higher compensation for the extra risk that comes with them. Since VB and SPY began trading simultaneously in January 2004, VB has returned 9.8% annualized versus 8.5% for SPY. Strategy #4 Though this portfolio only has three ETFs (and no individual stock holdings), it takes a complete international approach. (Source: Strategy #4) 70% is invested in international stocks through VT, which holds approximately half its holdings in US stocks, 40% in developed markets (ex-US), and 10% in emerging markets. It has 849 holdings in total. 20% is placed in BNDX, an investment-grade international bond ETF. Three-fourths of its holdings are comprised of government-related securities. If the bond market trades flat, this ETF should provide 1.5%-1.6% in annual yield including fees, which is right around the pace of core US inflation. Bonds nonetheless provide diversification benefits that can’t be achieved by investing in different stocks. The correlation between VT and BNDX is -0.10 (with -1.00 being a perfect negative correlation and +1.00 being a perfect positive correlation). The portfolio is capped off with 10% put into the international real estate ETF VNQI. The majority of this fund is concentrated in developed markets (80%) with Asia-Pacific having the strongest regional representation (55%). Real estate doesn’t provide a high level of diversification benefit relative to equities (generally a 70%-80% correlation), but REITs in particular are well regarded by investors seeking dividend income. Strategy #5 Here we have another all-ETF, all-equity portfolio, with a slant toward an international focus. (Source: Strategy #5) VT and VEU (world stocks ex-US) are the top two allocations, both at approximately 20% each. This trader adds in biotech exposure through XBI, which adds growth and perhaps a bullish long-term bet on the increased demand for the sector moving forward. 11.7% of the portfolio is dedicated toward emerging markets (SCHE), of which approximately half is concentrated in China, India, and Taiwan. The remaining 31% of the portfolio comes in the form of US stocks (VOO) and real estate (VNQ), as well as additional exposure to international equities with VXUS, which holds 45% of its assets in Europe and 45% in Asia and Asia-Pacific. Conclusion ETFs can be a valuable way to construct a portfolio given they provide diversification to hundreds, if not thousands, of different securities within one investment vehicle. This helps democratize the markets by making them more accessible to both smaller investors and also are of benefit to larger investors who wish to gain a certain type of market exposure at a good price. It also reduces the burden of needing to pick certain securities for which the extra time and effort required to do research at the microeconomic level may not be necessary. The five Marketplace portfolios above give some examples of how to allocate assets either exclusively with ETFs, or by using a mix of personal selections along with ETFs to make distinct bets on certain companies while still retaining the diversification benefit that index funds can provide.