Not so long ago, in 1993, the exchange-traded fund, or ETF, made its debut in the U.S. It was a puny new runt on the investing block, staring up at the behemoth known as the mutual fund.

But ETFs have matured and are now the investment of choice for many people.

A recent study by Vanguard concludes that investing in ETFs has grown popular due to several factors, including their lower costs and greater trading flexibility when compared with mutual funds.

Bankrate asked five professional money managers to offer their take on core portfolio holdings that all investors should own. Following are their recommendations.

Diversification is Key

Roberge says diversification is the key to building a successful portfolio.

"By its very nature, diversification actually reduces your overall investment risk," he says. "When one asset class does poorly, the hope is that other asset classes are doing well enough to uphold the portfolio."

Roberge says investors need to focus on two types of diversification:

  • Diversification depth allows for diversification within a specific asset class. For example, rather than a single U.S. large-cap stock, the investor can use an SandP 500 ETF that offers a broader slice of the large-cap market.
  • Diversification breadth focuses on the number of asset classes within a portfolio. For example, rather than simply owning an SandP 500 ETF that represents large-cap U.S. stocks, the investor can purchase ETFs that cover other asset classes, such as international stocks, U.S. and international bonds and real estate.

Roberge likes using ETFs because they make it easy to invest in funds that track various indexes. The proper mix of ETFs varies from investor to investor, he says.

"The percentages will vary depending on age, specific goals and risk tolerance of the investors," he says.

Investments Investing In ETFs: Core Portfolio Holdings

Not so long ago, in 1993, the exchange-traded fund, or ETF, made its debut in the U.S. It was a puny new runt on the investing block, staring up at the behemoth known as the mutual fund.

But ETFs have matured and are now the investment of choice for many people.

ETF assets soared from $161.7 billion in March 2004 to $1.71 trillion in March 2014, according to the Investment Company Institute -- an annual growth rate of about 26 percent. But ETF assets are still dwarfed by mutual funds' $15.23 trillion of assets as of March.

A recent study by Vanguard concludes that investing in ETFs has grown popular due to several factors, including their lower costs and greater trading flexibility when compared with mutual funds.

Bankrate asked five professional money managers to offer their take on core portfolio holdings that all investors should own. Following are their recommendations.

Know What You Own

Taylor likes the above five funds because they create a broadly diversified portfolio which, while not perfectly negatively correlated, contains asset classes "that tend to zig when the others zag," he says.

The key to constructing a portfolio from the ground up is to choose ETFs with broad objectives that do not overlap, he says.

"An ETF that tracks all non-U.S. stocks will typically include exposure to emerging market stocks," he says. "So a separate ETF that tracks emerging market stocks can be used, but it is not necessarily needed."

However, investors need to be aware of what a fund holds. For example, Treasury inflation-protected securities are bonds, but they typically are not found in an aggregate bond index fund. Buying a separate TIPS fund can help diversify the portfolio, he says.

"TIPS as an asset class tend to have low correlation to the bond market as a whole, and will react differently than the aggregate bond index in most years," he says, adding that TIPS also do not tend to be highly correlated to stocks.

Taylor says sticking to the five core funds he recommends offers a broad selection of complementary asset classes. While there is an ocean of different ETF possibilities, novice investors who buy too many funds risk inadvertently tilting their portfolios too heavily in any one direction.

"Too much flexibility can be a bad thing if an investor doesn't fully understand the exposure they may be taking on," he says.

Investments Investing In ETFs: Core Portfolio Holdings

Not so long ago, in 1993, the exchange-traded fund, or ETF, made its debut in the U.S. It was a puny new runt on the investing block, staring up at the behemoth known as the mutual fund.

But ETFs have matured and are now the investment of choice for many people.

ETF assets soared from $161.7 billion in March 2004 to $1.71 trillion in March 2014, according to the Investment Company Institute -- an annual growth rate of about 26 percent. But ETF assets are still dwarfed by mutual funds' $15.23 trillion of assets as of March.

A recent study by Vanguard concludes that investing in ETFs has grown popular due to several factors, including their lower costs and greater trading flexibility when compared with mutual funds.

Bankrate asked five professional money managers to offer their take on core portfolio holdings that all investors should own. Following are their recommendations.

Tactical Strategies

Kubik's firm changes its mix of ETFs by regularly overweighting or underweighting styles based on market cycles. The firm prefers investing in ETFs with broad market exposure, such as the Russell or SandP funds that own stocks from many companies.

The firm also overweights or underweights sector or industry ETFs, again based on the market cycle.

Kubik says the above portfolio makes sense for investors with $30,000 or less, and those who do not want to take a tactical approach to investing.

"The reason the size of the portfolio matters is due to transaction costs," he says. "The benefits for being tactical with an investment strategy can be eroded by too many transaction costs if the total portfolio size is not large enough."

Kubik's list of recommended funds changes as people have more money to invest. For example, for investors with between $30,000 and $60,000, he would drop the large-cap and small-cap funds and replace them with value funds (both large-cap and small-cap) and growth funds (both large-cap and small-cap). He would also add an actively managed bond fund that targets bonds with a specific duration, credit and structure.

For investors with more than $60,000, Kubik would add:

  • A sector overlay to overweight the industries based on the market cycle.
  • In some market conditions, additional exposures may be added to real estate, emerging markets, high-yield and other funds.

Investments Investing In ETFs: Core Portfolio Holdings

Not so long ago, in 1993, the exchange-traded fund, or ETF, made its debut in the U.S. It was a puny new runt on the investing block, staring up at the behemoth known as the mutual fund.

But ETFs have matured and are now the investment of choice for many people.

ETF assets soared from $161.7 billion in March 2004 to $1.71 trillion in March 2014, according to the Investment Company Institute -- an annual growth rate of about 26 percent. But ETF assets are still dwarfed by mutual funds' $15.23 trillion of assets as of March.

A recent study by Vanguard concludes that investing in ETFs has grown popular due to several factors, including their lower costs and greater trading flexibility when compared with mutual funds.

Bankrate asked five professional money managers to offer their take on core portfolio holdings that all investors should own. Following are their recommendations.

Core Market' Funds

Alexander says that investing in ETFs can be done with a minimum of fuss and muss.

"They track an index and have low expense ratios," she says. "You don't have to keep track of individual stocks or monitor an active manager."

However, she adds that there is no "appropriate" number of ETFs that every investor should own.

"The number of ETFs would depend on the investor's risk tolerance and portfolio size," she says.

As a general rule, she would recommend the funds above. She says both the broad market ETF and the mid-cap value ETF are good "core market" funds.

"Adding a value fund will create diversification, as well as having the potential to increase returns over time," she says.

Alexander does not recommend using bond index ETFs and suggests purchasing an actively managed bond mutual fund instead.

"Bond managers can actually add value to investors," she says. "The bond markets tend to be more inefficient, so it's possible to find extra returns over the index by using an active manager."

Investments Investing In ETFs: Core Portfolio Holdings

Not so long ago, in 1993, the exchange-traded fund, or ETF, made its debut in the U.S. It was a puny new runt on the investing block, staring up at the behemoth known as the mutual fund.

But ETFs have matured and are now the investment of choice for many people.

ETF assets soared from $161.7 billion in March 2004 to $1.71 trillion in March 2014, according to the Investment Company Institute -- an annual growth rate of about 26 percent. But ETF assets are still dwarfed by mutual funds' $15.23 trillion of assets as of March.

A recent study by Vanguard concludes that investing in ETFs has grown popular due to several factors, including their lower costs and greater trading flexibility when compared with mutual funds.

Bankrate asked five professional money managers to offer their take on core portfolio holdings that all investors should own. Following are their recommendations.

Solid Allocation Strategy

Pelfrey says it is difficult to generalize about how many ETFs a person needs for a well-rounded portfolio.

"I don't know that there is a specific number of ETFs that is appropriate for every investor," he says. "Every client's situation is different."

Instead, Pelfrey tries to craft a plan appropriate for an investor's needs, goals, risk tolerance and time horizon. For some clients, that means a strategy focused on preserving capital. Others require a more aggressive approach.

"However, in most circumstances, we are striving for a broadly diversified portfolio strategy," he says.

For many clients, Pelfrey's firm will use a strategy centered on eight to 12 ETFs with exposure to a variety of asset classes.

But he says the funds listed above should do the job for many investors.

"You can build a solid allocation strategy to meet a broad range of objectives" with those funds, he says.

Copyright 2014, Bankrate Inc.