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How to Strengthen Your Core Portfolio

Your portfolio's core should be strong, but it doesn't have to be boring

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In strength training and investing, your core is everything. It’s the foundation or base from which you build upon to reach new levels of success.

Without a solid core, you are doomed to underachieve because you don’t have the right balance needed to attain your goals. By starting from the ground up using concrete core holdings, you can add additional tactical positions to enhance your returns. That way you will have a well-rounded portfolio strategy that’s easy to understand.

I define core investments positions as large, diversified and liquid holdings that give you correlation to a broad index or segment of the market. Typically, I allocate anywhere between 40% to 60% of my portfolio to core positions at any given time. The allocation usually shifts in response to changing market conditions in the context of an actively managed risk framework.

ETFs are without a doubt the easiest way to add core positions to your portfolio because, in addition to the aforementioned traits, they are transparent, low-cost, and easy to trade. There is an ETF for virtually any stock, bond, or commodity index that will give you instant access to a subset of underlying assets. However, with so many ETFs to choose from, many investors get overwhelmed by the breadth of options and settle for plain vanilla positions.

Examples of plain vanilla core holdings include:

  • SPDR S&P 500 ETF (SPY)
  • Vanguard Total Stock Market ETF (VTI)
  • iShares MSCI EAFE ETF (EFA)
  • iShares Aggregate Bond Fund (AGG)

Not to be outdone, iShares has recently renamed and consolidated a suite of ETFs geared towards the core portfolio theme. Without a doubt, these 10 ETFs are aimed squarely at retail investors that are looking for easy-to-access correlation to domestic stocks, international stocks, or bonds. They are definitely a step in the right direction when it comes to adding exposure to your portfolio, but they fall short in the excitement factor.

While there’s nothing wrong with these funds — I have used them regularly in the past — there are many other innovative choices in the ETF universe that could offer unique advantages over a bland index. Let’s examine some three alternative strategies that may enhance your core returns.

Equal-Weight ETFs

ETFs that follow a market cap weighted index allocate the majority of their assets to the largest stocks in their portfolio. By contrast, equal-weight ETFs allocate their portfolios equally across every stock in the index, no matter what their fundamental characteristics may be.

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