One of the tremendous benefits of using exchange-traded funds (ETFs) is the ability to customize your exposure to target a specific theme. This flexibility allows for greater control of your sector and position sizing relative to a broad-market benchmark such as the S&P 500 Index.
Investors who are looking to build a solid foundation should start out with a traditional core holding such as the iShares S&P 500 ETF (IVV) or the Vanguard Total Stock Market ETF (VTI). Both of these funds provide market-cap weighted exposure to every sector of the economy. Ultimately, that means transparent correlation to the U.S. stock market at an extremely low cost. You own the whole shebang.
ImageFlow/Shutterstock.com
For those that want to get a little more sophisticated, there can be significant opportunities to overweight your holdings towards a specific subset of stocks using a growth or value-focused index. This may be appropriate for a portion of your stock allocation as a tactical addition or a fundamental enhancement.
Below is a list of reasons why this may make sense:
– You have significant exposure to a single sector or stock in your company retirement plan and want to diversify away from this area.
– One group (growth or value) has meaningfully outperforming the benchmark and you wish to take advantage of this recent momentum.
– You subscribe to a fundamental belief in growth or value characteristics.
– You are trying to take advantage of a mean-reversion opportunity after a prolonged period of underperformance by one group or the other.
– You want to fine tune your sector exposure to varying degrees than the conventional sector weights of a market-cap weighted index.
Whatever the case may be, there are a number of tools and indexes to achieve your goals. For example, the iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE) are two ways of splitting this large-cap index apart. The interesting thing about IVW and IVE is that they aren’t pure growth or value. They also hold stocks with a blended or undefined classification as well.
Continued on the next page.
