The Basics of Building an ETF Portfolio
November 2nd at 6:00am by Tom Lydon
Exchange traded funds (ETFs) are intended for creating a low-cost and diverse portfolio regardless of which type of investor you may be. Here’s a breakdown of the various categories you can consider.
For every portfolio need, there is an ETF to fill it. Whether you’re looking in a niche area of the market or need an all-encompassing broad-based fund. Here is a simple breakdown from Aaron Levitt on Investopedia to help get you started.
Theme Funds: Some ETFs track an index centered around a theme or niche of the market, ranging from small-caps to solar energy, and everything in between. Examples of this include Claymore Global Solar Energy (NYSEArca:TAN) or Vanguard Small Cap ETF (NYSEArca:VB).
Broad-based “simple” ETFs: Broad-based funds are all-encompassing fund that give total exposure to a segment of the market. There are plenty of broad-based ETFs that can help get any portfolio on the right track. For instance, SPDR S&P 500 (NYSEArca: SPY) and Vanguard Total Stock Market (NYSEArca: VTI) can get you started. (Four rules for ETF investing).
Bonds: This area should not be forgotten, and can add the right amount of diversification from the equity market. Vanguard Total Bond Market (NYSEArca: BND) is a broad-based bond ETF that covers most bases. (How bonds are overcoming challenges).
Extras: Once the core of your portfolio is in place, you can play around with the extras and the niche or fancy funds. iShares S&P North American Natural Resources (NYSEArca: IGE) is a good example of this. (Do alternative ETFs belong in your portfolio?)
Becoming a good trader: Being a good trader involves education, time, patience, trial and error and a willingness to examine your good moves along with the bad ones. (10 tips to improve your ETF game).
A Plan: Last, but not least, you need a plan for investing. Assess your risk, your time horizon and your strategy. We use a trend following strategy, which you can read about in The ETF Trend Following Playbook.
For more stories about ETFs, visit our ETF 101 category.
