Portfolio Rebalancing, Diversification, and ETFs

In addition to dreaming about the great investment opportunities of 2008, the end of the year is a time when many investors think about rebalancing their portfolios, enhancing diversification, and lowering risk. It is also a good time to cut loose bad ideas and bad investments, while at the same time opening one’s mind to the possibility of new types of investments.

I can’t say where the best opportunities for 2008 lie, but I can tell you where to find them. Without a doubt, many the best investments for 2008 will found among the ETF universe. This should not come as a surprise, as the ETF universe has, by far, the broadest array of investment vehicles. So while some individual stocks may top next year’s list in terms of total return, the careful selection of a few ETFs in new asset classes will provide a better opportunity to enhance returns and lower overall portfolio risk at the same time.

While there are a number of places to research and screen ETFs, I am also a fan of those handy one page ETF ‘cheat sheets’ put out by Bespoke Investment Group: the US ETF Family Tree; and the Global ETF Family Tree, each of which are superbly organized. For my purposes, however, I can do one better with a four page PDF from ETF Guide: ETF Reference Guide 2007 Q4. Updated quarterly, this document gives me four important pieces of information that are not available from the Bespoke cheat sheets:

1. Indication of which ETFs are optionable
2. Average daily volume
3. Expense ratio
4. Expense ratio median for each category

Armed with this information, now is as good a time as any to start thinking about how to take advantage of the changing mix of investment opportunities – and the ETFs that can expand the scope of your investment reach.