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Preparing Your ETF Portfolio For A Successful 2018

Everyone starts out the New Year with a fresh metaphorical slate and the expectation that the next twelve months will be full of opportunity. This view is one that many investors are now embracing as we continue to experience expanding prices through the breadth of the current bull market.

The turning of the calendar is also a perfect opportunity to evaluate your positions and diligently prepare your portfolio for success. The following tips can help balance risk and shore up any holes in your existing asset allocation.

1. Review your asset allocation targets. Every year we get a little bit older and our lives change. This natural progression is why it’s critical to evaluate your investment targets to ensure you aren’t taking more or less risk than you can handle. This should include a broad analysis of your equity, fixed-income, and cash (stable value) holdings to ensure they are properly aligned to your personal comfort level.

The hard part is not letting the recent bias of low volatility and strong trend in stocks dictate the need for higher risk at an inopportune moment. Make sure that any changes to your portfolio are planned with a multi-step approach and the knowledge that the timing may not always be perfect.

2. Look for additional ways to transition to ETFs. The nearly $500 billion that moved into ETFs in the calendar year 2017 is a ringing endorsement for how investors, advisors, and institutions are transitioning to these funds. Their benefits continue to shine bright as low-cost, liquidity, transparency, and tax-efficiency are highlighted daily.

Those who have moved just a portion of their portfolio to ETFs may want to look for ways to further this journey. An easy step is to identify underperforming mutual funds or individual stocks that can be replaced with a lower cost or more diversified ETF. This can allow you to stay with a similar theme or factor, while reducing your expenses and gaining a clearer picture of how your portfolio operates.

Looking to buy your first ETF? This quick guide can help.

3. Rebalance any over or underweight holdings. One common effect of portfolios with factor or sector selection bias is the impact of outsized performance in any given year. This can skew your overall stock allocation towards one area of the market and potentially lead to misaligned diversification characteristics.

For example, the Technology Select Sector SPDR (XLK) had a monster 2017 by gaining more than 34% as heavyweights such as Apple Inc (AAPL) and Facebook (FB) surged to new highs. An investor who started out with a 5% or 10% allocation to XLK at the beginning of the year is likely to have seen this allocation expand in their accounts due to price appreciation.

It’s a perfect time to evaluate the merits of re-balancing overweight holdings (selling) and looking to deploy that capital in other areas that have underperformed. The benefit is a reduced emphasis on a small group of companies or sectors and the ability to seek out potentially undervalued areas of the market. The weakest areas of the U.S. market in 2017 included: energy, consumer staples, and utility stocks.

4. Review any risk management triggers. One of the benefits of using an ETF versus a mutual fund is the ability to place stop losses and other risk management triggers on these positions. A stop loss allows investors and traders the opportunity to automatically exit a holding and move to cash at a predetermined price or percentage off the high.

For those who utilize this feature through their brokerage account, it’s important to continually review your exit points to determine if they need to be tightened or loosened accordingly. It should also be considered that automatic triggers with market price settings are susceptible to short-term gaps lower. Be wary of this risk before you implement them in your portfolio.

The Bottom Line

Even the best investors need to continually review their holdings and risk characteristics to ensure they are positioned for success. The ringing of the New Year is an excellent time to complete this task and ensure you have all the right tools at your disposal.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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