ETF Investing - Part 3 (Addendum to your existing portfolio)

This is Part3 in a multipart series exploring ETF investing. Click to read Part1 and Part2.

If you have already established a core portfolio and are looking for something that would let you get a quick exposure to say, another country, or another asset class, without taking on a significant risk, you can use ETFs. Certain scenarios include:

• International Exposure:

If you own only domestic US stocks, and are looking to diversify into international markets, an ETF like Vanguard All World Except US (VEU) can be a good bet. For that matter, using only 2 ETFs like Vanguard Total Stock Market ETF (VTI) and Vanguard All World Except US ETF(VEU), you can gain a diversified exposure to the entire world's capital markets.

If you are looking for a specific region exposure like Europe or Asia, you can take a look at the Vanguard European ETF (VGK) and SPDR S&P Emerging Asia Pacific(GMF) respectively. If you are bullish on Pacific countries like Australia, New Zealand etc, you can invest in Pacific-ex Japan ETF like iShares MSCI Pacific ex-Japan (EPP).

If you are looking for country-specific exposure like India or China, you have the iPath India ETN (INP) (currently there is no ETF for India, but for all practical purposes, you can consider this ETN as a viable alternative) and iShares FTSE/Xinhua China 25 Index (FXI) respectively. However, if you think that India and China are bubbles, and would like to invest in Malaysia, South Korea or Middle East, you have the iShares MSCI Malaysia Index (EWM), iShares MSCI South Korea Index (EWY) and SPDR S&P Emerging Middle East & Africa (GAF)respectively.

• Market Cap Exposure:

Market caps can be divided into three categories - Large-cap, Mid-cap and Small-cap. Lets say that you have been a cautious and conservative investor so far and have a lot of large-caps like GE, Exxon Mobil (XOM), Verizon (VZ) etc., and now you decide to move into a slightly more aggressive field like mid-caps. However, you might want to be aggressive with minimum risk exposure by diversifying into a broad range of mid-cap companies - and guess what, Vanguard mid-cap growth ETF(VOT) comes to your help. Or you might want to have 50-50 exposure to mid caps and small caps, in which case you can invest in Vanguard mid-cap ETF (VOT) as well as Vanguard small-cap ETF (VBK).

• Sector Exposure:

If you are bullish on a specific sector, but dont want to risk your investment in just couple of stocks within that sector, you can choose to diversify using ETFs. If you are like me, you are probably bullish on oil and energy, and you can gain a good exposure to this sector using Energy Select Sector SPDR (XLE). If you are bullish on world technology, you can take a look at Technology Select Sector SPDR (XLK). If you are bullish on steel considering the rising demand from emerging economies, especially China, you can invest in the Market Vectors Steel ETF (SLX). If you like the prospects of healthcare companies in general, you can research more about Vanguard Health Care ETF (VHT).

• Shorting Exposure:

If you are bearish on the US Economy, just like Asif Suria is, you can still make money by shorting the entire S&P using UltraShort S&P500 ProShares (SDS). This ETF works inversely proportional to the S&P 500 index on a daily basis. If you think that small-caps have had their run and its once again time for the large-caps to run, you can invest in the UltraShort Russell2000 Growth ProShares (SKK). Instead of investing in short ETFs, you can instead also short any regular ETF - however, there are restrictions on doing this within retirement accounts, and thats where the short ETFs come in handy.

Part1
Part2
Part3