Opinions on My ETF Picks

[mdiamant]

Hello fellow investors!

Let me introduce myself. I'm almost 19 and entering sophomore year at WPI (http://www.wpi.edu). I intend to open up a Roth IRA account and invest $2000 this summer into various ETFs. The purpose of this investment is long term growth, hence the use of an IRA. I'm new to investing, but I have been reading a lot and watching Cramer. I'm investing first in ETFs because they involve less risk (hopefully!) than stocks. As I learn more, I will invest in stocks.

This being said, I've read about index funds and I've been watching the markets and Cramer's show to get an understanding of how it all works. I've also been researching on iShare's website, the company's ETFs I want to buy. Since I am young, I've tried to setup an ETF portfolio that is geared towards growth, higher return, and inevitably, higher risk. The following image is my (chopped up) excel spreadsheet that I created to pool all my potential ETFs.

http://img324.imageshack.us/img324/1884/etfassetallocation7ok.jpg

Let me quickly break down my choices:
1) First of all, all of the funds, except the bond fund, have high positive tracking errors essentially since inception.
2) Russell 1000: Low expense ratio, big companies, from my understanding seems like low risk.
3) Russell Midcap Value: Has had high returns over 5-year period and is more risky than Russell 1000, thus higher returns.
4) DJ U.S. Energy Sector: My opinion is oil here to stay for the forseeable future, and supplies will only tighten. This is one of my riskier investments.
5) DJ U.S. Healthcare Sector: This is one of two pure speculation funds for me. My belief is that with "baby boomers" retiring in the coming years, this sector can only go up.
6) MSCI Emerging Markets: Unfortunately it has a very high expense ratio, but I think this will also increase. This is my 2nd speculation play. As Cramer recently said on his show, the emerging markets no longer need the U.S. to support their growth. For this reason, I see this fund going up.
7) DJ U.S. Real Estate: Very volatile, but very rewarding. I'm not quite sure where this is going, so I am only allocating 5%. I'm investing here because this portfolio is geared towards higher returns with reasonable risk.
8) Lehman Aggregate Bond: Includes corporate, and not just Treasury bonds. Thus, it has higher yield. I chose this fund because average maturity is about 6.3 years, which helps avoid the volatility of long-term bonds. This is a safety investment that should not carry much risk. However, some of my peers advise that I do not need the Bond Index because of the little amount I am investing. If I dropped this, I would invest 5% each in Energy and Healthcare.

Well, that's it! Please let me know what you think of my picks. What should I research more? Did I miss a major fund that you think I should have as a young investor looking for high yields? Do I have bad picks, which I'm sure I do because I'm new to this! Also, and this is very important, did I allocate the money well? I know it's only $2000, but I want to spread it efficiently. Looking forward to your educated input. I've just joined the forum, but I've been reading lots of posts for several weeks. You guys are good. Thank you guys!

[Hanger]

You have definately done your homework, which is important. Starting at a young age is a good move. At 19, you can "afford" riskier plays. Ideally at 19, your going to want to be 90%-100% aggressive. As you get older and closer to retirement, obviously this number decreases, and the safer plays increase.
With that said, I feel alot of your ETF choices are right on the money for growth. IYR, may be the wrong time shortterm, but longterm as you are targeting should be just fine.

Take a look at EFA-Tracks Europe,and Far East Stocks, also for your energy play, take a look at IYM, chart mirrors IYE, although currently a little cheaper, but unlike IYE it also tracks precious metals, basic materials and energy. In the long term, gold will be going higher, question is how high and when, every analyst has a theory.

Starting with $2000, I feel as though you are thinning yourself out a little too much, again just my opinion. But you might find you will be better off, going with 3-5 for now, and then growing your portfolio as more $$$ to invest becomes available.

A good theory here IMO is to create a base, going with what you posted above something like this
Russell 1000
IYR
IYE or IYM
IYH
EFA
Just divide it up, and some might say you could probably forget about it for awhile, just revisit is accordingly and make changes, i.e foreign markets fall off the chart, or real estate takes a hit because interest rates are climbing (cough cough)

On second thought, now may not be the time to get into the Real Estate ETF as it appears alot of numbers that would contribute to this ETF are dropping, may want to hold off a few months and let things settle, but I don't know that much about real estate, hopefully someone else can chime in on it.

Ok, I am done rambling, I am sure others will give their input, but good job so far, you definately seem like your starting off on a great foot.

[aiki14]

I can't add too much too what Hanger said, and I agree you may be a tad spread out. You have to pay the commissions on ETF's so no sense going into too many.
I may be more bullish on real estate as well, as long as the fund is in commercial real estate you're OK. As interest rates go up people don't buy they rent so that remains a good investment. And business property is always good in good economic times, my REIT's are kicking even in the up interest market. And with REIT's when the time comes to buy a house the money can be used tax free (with some restrictions) using a 1031 exchange. (anyone buying or selling investment real estate should look into this, PM me if you need more info)
It's nice to see someone your age going into this, when I was 19 we weren't thinking about the future too much past the weekend. I can't tell you how important it is to start saving now, It's really nice to be able to do what you want when you're young enough to do it, and money makes that happen.

[pmb1010]

With only 2k, I'd put it all into the dividend index fund DVY and leave it there.

[ooskylineoo]

just put the money into one etf
an etf is already diversified
if u want to get your feet wet then put it into a braod market index
2000 is not alot but its a start

[bahroor]

just put the money into one etf
an etf is already diversified
if u want to get your feet wet then put it into a braod market index
2000 is not alot but its a start

Ditto.
One or two max (real estate, energy).
No need to pay more commisison fees to diversify your already diversified 2K.

But let me just say, wow, 19 huh?, when I was 19.... nevermind.
Smart move kid, I'm sure you'll add to that 2K over time and will be just fine.

[bahroor]

Oh yeah, one more thing,

http://www.qqqdirect.mystockfund.com/

You can buy QQQQ directly through them, even add more money every month if you want to and never pay a comission.

Just a thought.

GL

[Imperator]

Look into EWZ for brazil.. it is down quite a bit over the last month.

In your sector ETFs, you could buy when they are down and focus on certain ones throughout the economic cycles/

[BornInZion]

Good job! You are well on your way! If you are going to do an index for the long term, I would recommend a small cap value style index fund. This sector has out performed all others over the last 80 years... but not for every year.

Take your best shot, your interest in the market will sharpen when you have money on the line, and that will hasten your education!

Then explore these sites:
http://www.ifa.com/
http://www.fundadvice.com/home/
http://www.madmoneymachine.com/

The two MUST READ articles (if you do nothing else, read these) are:
http://www.fundadvice.com/articles/buy-hold/the-ultimate-buy-and-hold-strategy.html
http://www.fundadvice.com/fehtml/bhstrategies/0309/0309a.html

Good advice for the long term there. Learn about it, for you will one day put most of your money behind the strategy that they recommend. I have, and I am restricting my "Mad Money" to 5% of my investing dollars. My Mad Money account is really fun, but my retirement rests on more of a sure thing.

Cheers!

[mdiamant]

Booooyah!

Thanks for all the responses. I've definitely taken some time to consider your opinions. I can see why you guys would reccomend that I only invest in one or two ETFs because of the investment size. However, I am leaning towards taking a track of about 5 ETFs because I want to access several different parts of the market. I did read those reccommended articles, and I bookmarked the second one. Good reading!

I looked at the Russell 2000 and compared it to the Russell 1000 and I think the extra risk is not worth it for me because the rest of my funds carry what can be considered, high risk. At least initially I will go with the Russelll 1000, which has displayed a consistent upward trendline. I also like Exxon because who doesn't like oil? And as Cramer has said, he likes banks like Bank of America and Citigroup. I personally feel that Microsoft will rebound with the release of Vista. So I feel like the Russell 1000 is strong.

I made some other revisions to my ETFs. Here is what my final picks might be:

http://img318.imageshack.us/img318/7589/etfassetallocation1nu.jpg

I liked the pick on EFA. However, for now I like EEM more. I added EFA and the Russell 2000 to a list of potential picks that I am going to continue to watch. Thank you for these reccomendations! It helps expand my vision.Let me know what you think of this revised set of picks. Thank you again!

[mdiamant]

As an addition to the above post (the last post on the previous page), the following question has been confusing me and I have no idea where to find the answer!

I intend to do the ETF investing from a Roth IRA account. My understanding is that I will be taxed for my contributions, but not for funds generated in the account. My question is, where can I calculate how much my initial investment (contribution) of $2000 will be taxed?

I'm assuming it will be very little because I make less than $10,000 per year, but I want to ensure I will actually have $2000 to invest less the commission fees to order the ETFs. Thank you again guys! You are all an excellent source of information and help.

[Hanger]

Tax Treatment of Roth IRA Distributions (http://www.investopedia.com/articles/retirement/03/030403.asp)

Roth IRA (http://www.investopedia.com/articles/retirement/04/091504.asp)

Read both of these, should provide a better insight on taxation of Roth IRAs.

[pmb1010]

To answer the question directly, you are not taxed on any funds placed into a Roth IRA. It uses already taxed money (income) you have on hand.

When you withdraw a Roth (assuming normal retirement time) the funds, and the gains, are received tax free.

This is in comparision to a 401k, where you can put Pre-tax money into it.
When you withdraw, it's taxed at that time. Hopefully, at a lower rate.

[mdiamant]

Thank you for the quick replies. It makes much more sense now! I was reviewing some more ETFs and I came across:
Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO)

I have looked at its trendline, which has not been too great, but I would think there is explosive potential here. Do you agree?

[optimus25]

I'm impressed with the amount of work you've put into starting your portfolio. It might be a good idea to present this to your parents to see if they would "match" your contributions. It might be a little late but $2000 is way to small to diversify, but since you have to, you're on the right track. Instead of the Healthcare Sector Index, you might want to look into one of the Biotech Indexes. Biotech would probably have a higher Beta and therefore, higher volatility, but would also carry a higher reward vs. Healthcare. I do like the Russell 2000 and the MDY (mid cap index). You could increase your international exposure to 5-10% more by using the EFA.