Is it ethical and right to include template-based works (i.e. sites built from a WordPress theme) in your portfolio, or is it considered the property of the original author?
Disregarding the implications of derivative work, that's a legal matter and different. Template systems are meant to be altered in many instances.
There are a ton of positions out there which are looking specifically for those who can alter template systems to client demands.
Bootstrap is a template system. Wordpress is a template system. And there are dozens more. Many employment positions, or client requests are specifically looking to adapt an existing system to meet demands.
If it is this type of position you are seeking, then showing off your ability to adapt a template system to meet various demands would be beneficial.
Conversely though, if you are seeking positions or clients interested in actual design and creativity, showing template alterations in a portfolio will do nothing more than devalue your portfolio.
Ethically . . . If you fully disclose that you've edited templates, I think it's fine. If you do not disclose that you've merely edited templates and are hired based upon those templates, you would be committing fraud to some degree which could be grounds for dismissal. It certainly would never reflect well on you if this was discovered after the fact.
To look at it differently.....
Imagine you're a chef.. applying for a position as a chef. You are asked to make a pasta dish to show off your culinary skills. You can either create marinara sauce from scratch or open a jar of Ragu marinara sauce. Which do you think would offer a better impression? While using a jar of Ragu may be absolutely fine in day-to-day operations, if the goal is to show off how great you can cook, building from scratch certainly does a better job at that.
I would say this depends on how you position yourself and the work. If your portfolio is based around the design part, then focus on that and only showcase your own designs. If instead you position yourself as a developer or 'fix-it-all' kind of designer open to all budgets, then you can also showcase template based work.
In which case it might be relevant to highlight the services included, and you can see that in some portfolios, where designers will include a list of what was delivered for each job. Eg. 'custom design' vs. 'customized theme'. Even when customizing something, you are still designing and converting feedback into actual work, and the end result could be much different from the original template.
Many clients will not have anything against using templates as they can see the benefits (quicker, cheaper) and will not afford to have a proper custom WP theme built (which can easily be 100+ times more expensive than a ready-made theme).
I have had clients requesting me directly we buy a template. Other clients wanted the most unique awesome website nobody else has, but when faced with the cost of a custom design, they freak out and go like, 'look i thought this was going to be 100$'.
So yeah, it is ethical in a way to only show off your 'creative' side, but nowadays there are many providers, some of which are doing quite well showing off whatever they want.
I believe it's in you best interest to create a portfolio you can be proud of. It shouldn't include anything you would rather not talk about.
When you are showing the portfolio to a client/employer, you should be able and willing to go into any detail. A job interview can be a stressful situation. No need to make it even more stressful by adding things you are unsure of.
If you choose to include work based on templates, you should be honest about it. But be aware that it will only show that you can download and use a template. And people could suspect that all your work is template based.
It's a scam if you let someone to think that you have created this from scratch. When the truth is revealed, you're stamped.
Be sure that it's clearly shown what was got from the outside source and what is created by you."I created and added these XXXs to this YYY, which is purchased". If the XXXs are flashy and clearly a great part of the total fineness, it can be very useful to show them in the right context.
You must have a right to use the 3rd party work. If you haven't, you are a thief.
Remember: You have made something yourself for someone. It can totally belong to someone else, if you haven't secured the right to use it in your portfolio. The right = a written agreement, nothing else.
This question is not really only one of ethics, but it may have legal implications. Disclaimer: I am not a lawyer. If you want legal advice, hire one.
As long as A) you have permission to use the template to make a derivate work, and B) you mention that you used a template, and what you did to customise it, then I'd say it's absolutely fine.
If you are honest, then I can't see the problem.
You will of course have to check the terms of the licence for using the template, to find out if you have permission to alter it. If you can't find that, perhaps check with the author of the template. They may be able to offer you a licence that allows you to make derivatives.
Take credit where it's due. Give credit where it's due. We all have our strengths and weaknesses and it's important to not misrepresent yourself if you want to avoid embarrassing moments or worse. Like with everything else in life honesty is the best policy.
Having said that does a painter feel like a cheater because he didn't grind his own colors and used a prepared board?—most painters since the invention of oil paints in tubes. Does a sculptor feels like a cheat because he used a couple of Italian carvers to follow his design?—Daniel Chester French of the Lincoln Memorial. Does a musician feels like a cheat because he is playing something he didn't write? There is always several levels of involvement and people in the field can tell at a glance what your strengths and weaknesses are so play it cool and only take credit for what you built, designed or transformed.