If you're looking for a well-balanced portfolio, ETFs can be a great option. However, the question arises: how many ETFs do you need for a balanced ETF portfolio? An ETF, or exchange-traded fund, is a group of stocks traded as one stock. There are various types of ETFs available for sectors, markets, growth, value, and more. So, let's explore how many ETFs you should consider for your portfolio.
How many ETFs should you own?
Answers vary depending on your goals. Here are some criteria to consider:
Investment goals
Risk tolerance
Portfolio size
Time horizon
An ETF portfolio enables you to diversify your investments, which has become increasingly crucial in today's market. Owning several ETFs allows you to diversify across various sectors, potentially reducing the risk of overconcentration in a single area. While your portfolio may grow at a slower pace, the compounding gains over the long term can be significant.
The number of ETFs I recommend is 6 featuring:
Index fund ETF
High Growth ETF
Large Cap ETF
Dividend ETF
International ETF
Bond ETF
Including these six ETFs in your portfolio can provide a well-diversified investment strategy. The percentage of allocation to each type of ETF should align with your investment goals. For instance, if you desire an income-driven portfolio, it is recommended to invest more heavily in dividend and bond ETFs. Conversely, if you are seeking capital appreciation, high-growth, and large-cap ETFs may be more suitable.
For beginners, index funds are a great option as they track the gains of major indexes in the stock market such as the S&P 500, Dow Jones, and Nasdaq. Additionally, these ETFs may offer dividends, allowing you to achieve two goals with one investment. For further information on index funds, check out "Best Index Funds to Invest in For Beginner Investors".
How can you build a diversified ETF portfolio?
For beginner investors, building an ETF portfolio can be a challenging task. However, the most critical aspect is to acquire knowledge, which you are currently doing by reading this blog. It's essential to have a fundamental understanding of the market to determine which ETFs are suitable for your portfolio.
In this article, we will examine two examples of different ETF portfolios.
First Scenario
George is a 22-year-old who just graduated college and started his first job. He wants to start investing and wants to focus on capital appreciation. His plan is to retire at 60.
Index fund ETF - 35%
High Growth ETF - 25%
Large Cap ETF - 25%
Dividend ETF - 15%
International ETF - 0%
Bond ETF - 0%
Given George's goal of capital appreciation and retirement plan, a growth-oriented portfolio is ideal for him. While these portfolios tend to be more volatile than income-driven portfolios, they are generally less risky than investing solely in individual stocks. Automating monthly investments into this portfolio can prepare George for retirement, and he can later shift his investments into income-driven assets to generate income during his retirement years. It is advisable for George to seek the advice of a financial advisor to ensure that her portfolio is tailored to her specific needs and risk tolerance.
Second Scenario
Claudia, who is 57 years old and planning to retire at 60, is seeking a stable and reliable investment strategy to transfer her life savings, earnings, and investments, totaling $2,000,000, into her retirement fund. Her primary objective is to generate a steady income to support her retirement years.
Index fund ETF - 5%
High Growth ETF - 0%
Large Cap ETF - 0%
Dividend ETF - 25%
International ETF - 20%
Bond ETF - 50%
Given Claudia's investment goals of earning a stable income and preserving her wealth, an income-driven portfolio consisting of stable assets is ideal for her. Bond ETFs, which offer stability and pay a yield, can be included in her portfolio. International ETFs, which invest globally and include dividends, may also be a good addition. Dividend ETFs, which pay dividends regularly, can provide an additional source of income.
To add a small amount of growth potential, an index fund may also be included in the portfolio. With this combination of assets, Claudia can expect to earn an annual return of 3-5% from dividends, resulting in a range of $60,000 to $100,000 per year. This portfolio is aligned with Claudia's investment objectives of earning income and preserving capital. It is advisable for Claudia to seek the advice of a financial advisor to ensure that her portfolio is tailored to her specific needs and risk tolerance.
Why you should consider ETF?
ETFs are very beneficial for investors. They carry lower risk and you can enjoy compounding returns. ETF portfolios are constantly updated and you won't have to pay taxes for the transactions that incur. Capital gains tax can be as much as 37%! So, it's definitely much more convenient.
Learn more about Capital Gains at All You Need To Know About Capital Gains Tax On Stocks.
ETFs don't require constant research and you don't need to time your purchase like you have to do for several other investments.
ETF vs Stock
ETFs are a group of stocks in one and individual stocks are one company. ETFs tend to be less volatile than individual stocks. ETFs have a cost for holding onto them. The fees are generally low (average 0.16%) and the dividend from the ETF pays for it. Stocks, on the other hand, don't have fees for holding onto them.
ETFs are best for investors who want to be passive and stocks are best for knowledgeable investors who can beat the market.
ETF vs Mutual Fund
Mutual funds are managed by professional managers and are actively managed while ETFs are passively managed. Mutual funds (0.60%) cost more than ETFs (0.16%). ETFs are traded during normal market hours 9:30 am to 4:00 pm while mutual funds are traded at the end of a trading day (after 4:00 pm).
ETFs are more tax efficient. Investors don't pay tax until the ETF is sold for a profit. In mutual funds, the investors are also liable in paying taxes even if they haven't sold the fund because they are actively managed!
Mutual funds have a larger minimum investment requirement. To own an ETF, all you need is $1, while mutual funds require a minimum investment of $500 to $5000 for most retail investors.
Conclusion
ETFs are a great way to build a portfolio for your retirement. They are passive and low-risk investments. Start investing today with Robinhood and receive a free stock.
You were introduced to 6 different types of ETFs and how to build a portfolio with them. You learned about different scenarios and now it's time to research ETFs to invest in!