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How to select U.S. Equity ETFs.


How does an Individual Investor sort through and select from the multitude of Exchange Traded Funds (ETFs)?

ETF Screening Tools and Criteria in Practice.

Previously we used ETF screening tools and selection criteria to select Global and Canadian Equity and Bond ETF(s). Again, our aim is to build an ETF portfolio that resembles the PIAC average Pension Plan asset allocation.

Again, using PIAC as a reference portfolio, we next select the next largest allocation – U.S. Equities.

ASSET MIX OF PLAN AT DEC 31, 2010 PIAC Allocation ETF options include Simplified allocation
CASH -1.52%
CANADIAN BONDS 26.20% XBB, XSB 30%
REAL RETURN BONDS 4.58%
MORTGAGES 0.69%
FOREIGN BONDS 1.76% BND
CANADIAN EQUITIES 15.99% XIU 20%
U.S. EQUITIES 6.14% VV 10%
EAFE EQUITIES 5.84% VEA 10%
EMERGING MARKETS 3.05% VWO 10%
GLOBAL EQUITIES 12.42% VT ACWI
REAL ESTATE 8.86% XRE ZRE VNQ 10%
V.C. / PRIVATE EQUITY 7.24%
INFRASTRUCTURE 4.15% CIF
OTHER ASSETS 2.98% XAL 10%
HEDGE FUNDS 1.56%

U.S. Equities allocation.

Allocate ~10% (at least) to the U.S. stock market. (Include ~40-45% of the Global allocation. Despite its current woe’s, the U.S. market is still over near half the world market cap).

Index choices include the S&P 500 index, Dow Jones, Russell 1,000, 2,000 and 3,000. The U.S. Equity ETF choices are overwhelming.

To keep it simple, I use Vanguard’s MSCI U.S. Prime Market 750 index ETF (VV). VV maps to the largest 500 U.S. stocks plus it stretches exposure into the mid-cap space for the remaining 250 stocks. MER is a cheap 0.12%. Inception 2004. Lots of volume.

But if you must instead go Global,

Use the IndexUniverse ETF screening tool to select Equity (Asset Class), US & Canada (Region), US (Geography), and Equity U.S. Total Market (IndexUniverse segment). De-select Inverse, Leveraged, ETN’s. This will narrow the screen down to 20 U.S. Equity ETFs. Or change Equity U.S. Total Market to Equity U.S. Large Cap (IndexUniverse segment) for a broader look at 43 U.S. Equity ETFs.

Next time?
ETF selection tools for a REIT allocation.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
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