So, you want to start building your own investment portfolio and have heard that ETFs are a good way to start.
I totally agree.
In this article, I’ll share what I’ve learnt about building an ETF portfolio. By the end of this article, you should have a good idea of why you should use ETFs and how you can go about building your very own ETF portfolio.
First up, let’s address the elephant in the room:
Why use ETFs?
ETFs offer several advantages over investing in individual stocks, especially for younger investors like us who have limited capital to work with. ETFs gives you the following advantages:
- Diversification: ETFs allow you to invest in a diversified portfolio of stocks or other assets, which can help to spread risk and potentially reduce the impact of individual stock price movements.
- Convenience: ETFs can be bought and sold like stocks, providing investors with a simple and efficient way to gain exposure to a wide range of asset classes and sectors.
- Lower costs: ETFs typically have lower fees and expenses compared to actively managed mutual funds, and their expense ratios are often lower than those of individual stocks.
- Transparency: ETFs are required to disclose their holdings daily, providing investors with a level of transparency that is not always available with individual stocks.
- Access to niche markets: Some ETFs provide exposure to specific sectors or markets that may be difficult for individual investors to access or would require significant research to understand.
How to build an ETF portfolio?
In a nutshell, here’s a framework to help you build your ETF portfolio:
1.Determine your investment goals and risk tolerance.
To determine your investment goals and risk tolerance, consider the following steps:
- Define your investment goals: What do you want to achieve with your investments? Examples might include long-term growth and generating income.
- Consider your time horizon: How long do you plan to hold your investments? Generally, longer time horizons may allow for more risk-taking and higher potential returns.
- Assess your risk tolerance: How comfortable are you with market fluctuations and potential losses? This will depend on factors such as your age, income, investment experience, and overall financial situation.
- Determine your investment horizon: How long do you plan to hold your investments? Generally, longer investment horizons may allow for more risk-taking and higher potential returns.
- Review your overall financial situation: Consider your income, expenses, debt, and other investments to determine how much you can realistically invest, how often and how much risk you can afford to take on.
2. Decide on an ETF portfolio strategy that aligns with your goals.
There are many asset allocation strategies you can consider. We have touched on two basic strategies in our ETF investing guide.
If you’re a beginner with little capital to work with, the easiest strategy would be:
Basic Three Fund Portfolio Strategy
This strategy involves investing in three broad-based ETFs that provide exposure to the U.S. stock market, international stock market, and U.S. bond market.
A simple example of a basic three-fund portfolio might consist:
- Vanguard Total Stock Market ETF (VTI) – provides exposure to the entire U.S. stock market
- Vanguard Total International Stock ETF (VXUS) – provides exposure to international developed and emerging markets
- Vanguard Total Bond Market ETF (BND) – provides exposure to the entire U.S. bond market
Of course, if you’re lazy and don’t want to select your own ETFs or have to rebalance your portfolio manually, then consider:
Robo-Advisor Portfolio Strategy
As young millennials, we now have access to robo-advisors as well. This strategy involves using a robo-advisor service that selects and manages a portfolio of ETFs based on your investment goals and risk tolerance. Robo-advisors use algorithms and automated tools to create and manage a diversified portfolio of ETFs. Examples of popular robo-advisors include Betterment, Wealthfront, and M1 Finance.
This strategy provides a simple and convenient way to invest in ETFs, especially for beginners who may not have the time or expertise to manage their own portfolio.
3. Select ETFs that aligns with your chosen ETF portfolio strategy
At this stage, you should consider the ETF’s expense ratio and liquidity. You should also check if your brokerage can give you access to the ETFs you wish to use in your ETF portfolio.
Using the three fund portfolio example from the previous section, here’re the key considerations you should look at:
| Vanguard Total Stock Market ETF (VTI) | Vanguard Total International Stock ETF (VXUS) | Vanguard Total Bond Market ETF (BND) | |
| Expense Ratio | 0.03% | 0.07% | 0.03% |
| Assets under management (AUM)* | $272.10B | $55.83B | $91B |
*AUM is usually used as a proxy for liquidity. A higher AUM suggests that there are more investors vested in the ETF which means it’ll be easy for you to buy and sell the ETF. A good gauge is to look for ETFs with >$10B in AUM for broad market ETFs.
For the more advanced ETF investor, you may also want to explore alternative ETFs. For example, many investors like to compare VTI with VT.
4. Monitor your portfolio regularly and rebalance as necessary to maintain your desired asset allocation
If you’re using a robo-advisor, this stage will be done for you. However, if you’re building your own ETF portfolio, you should be monitoring your portfolio at regular intervals.
To make it easy to remember, I usually schedule a major annual check on my portfolio on the first day of my birthday month. This is when I’ll do a rebalance of my ETF portfolio.
Start building your own ETF portfolio
That’s it, the ball is now in your court. Remember, it’s more important for your money to spend time in the market rather than trying to find the best time to enter the market.
All the best!
