Ferri jumped to Smith Barney in 1994 doing much the same. "I also started to analyze commodities managers and began looking at different types of managers dealing in futures contracts," Ferri said. "I became a big user of commodities and all types of products."

As he learned more about active management, Ferri says it became clear to him that most of their claims were lacking in substantive benefits for investors. "After interviewing and reviewing active managers for awhile, it became clear they were dealing with smoke and mirrors," Ferri said. "It was pure marketing."

At the same time, he started becoming aware of the work of John Bogle, the founder of Vanguard. "I started converting our clients to indexing as much as possible," Ferri said. "But we had very limited access to outside funds."

Then the exchange-traded fund SPDRs (AMEX: SPY) came out in 1993. "When ETFs started hitting the market, it was like a godsend to me working at a brokerage," Ferri said. "It really gave me the freedom to use just that fund to start to convert my clients out of large-cap U.S. stock funds. That was a good start."

He approached a Smith Barney executive about starting a program that would provide access to index mutual funds in a way that would benefit both the brokerage and its clients. "But they wouldn't let that happen because Vanguard refused to compensate brokers. It had nothing to do with what's best for investors," Ferri said.

Under contract to Smith Barney, Ferri started planning ahead. In the summer of 1999, his deal with the brokerage house ended and Ferri left to start Portfolio Solutions LLC. The firm, which now manages more than $800 million in assets and has a staff of six, has links to Ferri's research and other topics at http://www.portfoliosolutions.com/.

"We try to get broad asset class exposure at the lowest costs possible," Ferri said. "That means we use a lot of Vanguard funds and ETFs."

He also uses selected Dimensional Funds Advisors products for his clients. "DFA has closed several funds over the last few years," Ferri said. "We've had to select different funds for new clients."

The Bedrock 

Around 60% of his portfolios are now using ETFs. His cornerstone for the firm's U.S. stock portfolios is the Vanguard Total Stock Market ETF (AMEX: VTI). Ferri will add the Vanguard REIT ETF (AMEX: VNQ) for real estate exposure. He also likes the Bridgeway Ultra-Small Company Market (BRSIX) index fund for micro-cap exposure.

Ferri also uses the iShares S&P SmallCap 600 Value Index (NYSEArca: IJS). "The Vanguard small cap value ETF has larger stocks and it has high exposure to real estate, which IJS doesn't," he said. "So we like the structure of IJS a little better than the Vanguard ETF at this point."

With foreign stocks, Ferri divides the world by region. He assigns fixed allocations to: Europe, the Pacific Rim, emerging markets and international small-cap value funds.

About 5% of Portfolio Solutions' total equity positions go into DFA Emerging Markets Core Equity Fund (DFCEX), which holds large- and small-caps from emerging markets and takes a value tilt. "There's not much benefit into slicing and dicing into other funds with such a small percentage of the overall portfolio going into emerging markets," Ferri said.

For international small-caps, he prefers the DFA International Small Cap Value (DISVX). That also averages roughly 5% of the firm's overall equity portfolios.

Another 10% goes into the Vanguard Pacific Stock ETF (AMEX: VPL); an equal amount is put into the Vanguard European Stock ETF (AMEX: VGK).

All told, Ferri will give a typical client about a 30% allocation to international stocks as a percentage of their total stock portfolios, which includes U.S. stocks.

"Nobody is going to know exactly what the best allocation to international stocks will prove to be in the future," Ferri said. "But looking back at past decades, a 30% allocation would position a portfolio the most efficiently. You may not make the most, but you won't do the worst, either."

He doesn't use commodities. "The price of commodities eventually is reflected in stocks, and commodities funds are expensive," Ferri said. "People don't need commodities funds to reach their financial objectives."

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