How to Build a Portfolio of ETFs

Exchange-Traded Funds (ETFs) are pooled investment funds traded on stock exchanges. They offer diversification and typically track a specific index, resulting in low management fees. ETFs are similar to mutual funds but are traded like stocks, providing flexibility and liquidity.

In this article, we will explain the necessary steps to build your ETFs portfolio, which could be summarized in the following parts:

1. Define Your Investment Goals

This step is one of the most important as it defines the time horizon and the financial goals you aim to achieve with this investment. You could use it to save towards retirement, buy a house, or save in the long run. Based on this information, you can calculate the years you would start withdrawing the investment.

2. Assess Your Risk Tolerance

Note that while all investments carry a risk of losing money, risk tolerance is the degree of risk that you would be willing to face based on the volatility of the investment.

To summarize, a higher risk tolerance normally entails a higher probability of higher returns but also a higher probability of losing your investment. On the other hand, a lower risk tolerance implies a lower probability of higher returns but also fewer chances of losing your investment.

In such a sense, we would associate the following assets based on risk tolerance:

• Conservative/cautious investors (low-risk profile): These risk-averse investors focus on preserving capital over maximising returns. These profiles are associated with assets such as bonds, savings accounts, money market funds, income funds, etc.
• Moderate investors (medium risk) are investors who are willing to take a medium risk level while maintaining a balance between risk and growth. These profiles normally combine assets for both conservative and aggressive investors.
• Aggressive investors (high-risk tolerance) are investors who prefer maximising the growth of their investments over the preservation of capital. These profiles are associated with assets such as stocks, ETFs, or equity funds.

3. Determine Your Asset Combination

The asset mix or asset allocation is the distribution of stocks, bonds, and cash within your portfolio. This mix should reflect your investment goals, time horizon, and risk tolerance. A diversified asset mix can balance potential returns and risks.

4. Understanding Different Investment Strategies of ETFs

Consider various investment strategies:

• Passive Indexing: For long-term growth, replicate a specific index like the FTSE 100, S&P500, or Nasdaq 100.
• Tactical Asset Allocation: Adjust allocations based on market conditions.
• Rotational Strategies: Focus on specific sectors or regions according to economic trends.

5. Choose your ETF portfolio

This step involves researching and analyzing the different ETFs within the market to find the best ones for you. You must analyse information such as Expense Ratios, Assets Under Management, Performance History, Physical or Synthetic replica, etc.

Based on this research, choose the ETFs that match your asset mix, portfolio structure, asset allocation, sector, performance…etc.

To help you with this step, we recommend reading the article: How to choose an ETF.

6. Develop an Entry Strategy

Once you have found which ETFs you would like to invest in, one of the most important things is to decide how and when to enter into the investment. This involves the frequency of your purchases, timing, and which one should go first. Some of the main strategies are:

• Dollar-Cost Averaging: Invest a fixed amount regularly to mitigate market volatility.
• Lump-Sum Investment: Purchase shares immediately to reach target allocations.
• Market Timing: Wait for specific market conditions or price points before investing.

7. Find the Right Broker to buy ETFs

Buying, holding, or selling ETFs might entail commissions, which could deplete your investment or returns in the long run. Therefore, it is important to choose a broker that allows you to buy/sell or hold your positions at lower costs based on your investment strategy.

Hereby, some brokers to invest in ETFs:

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Related articles:

• What is an ETF, and how it works
• How to choose an ETF
• ETF Taxation in the UK
• ETPs: Differences between ETFs, ETNs and ETCs
• Mutual Funds Vs ETFs: main differences
• ETF Market Price Vs Net Asset Value (NAV)
• ETFs and Dividends