Creating an ETF portfolio: recommendations and sample portfolio
The selection of exchange-traded funds is huge and continues to grow. This naturally raises the question of what a successful ETF portfolio might look like. We therefore take a look at the most important rules for putting one together and present some sample ETF portfolios.
In brief:
- An ETF portfolio is a mix of exchange-traded funds with the aim of achieving an overall result that is ideal for you.
- The composition may pursue different objectives (crisis resistance, maximum return, dividends, etc.).
- Classic methods such as the global portfolio or the 70-30 portfolio have proven themselves time and again.
- Don’t be swayed by recommendations and make sure that a strategy suits you and your capabilities!
What is an ETF portfolio and why do I need one?
Those taking their first steps on the stock market often buy stocks and ETFs recommended by supposed experts. Unsurprisingly, the results are usually mixed. If you are looking for solid long-term success and want to reliably grow your wealth, you need to approach the matter with a good plan!
This is where the concept of your portfolio comes into play. This term refers to your investments and assets – in short, your possessions. These include investments such as stocks, corporate and government bonds or ETFs, real estate, gold, cars, art objects and other valuable items.
In common parlance, the term is now primarily used for financial products. The portfolio describes the composition of your investments. Various aspects can be considered here:
- Investment class, i.e. stocks, ETFs, bonds, funds, call money, fixed-term deposits and much more. The focus here is on what percentage of your capital goes into which product.
- It is also possible to divide them into different sectors. Technology, consumer goods, finance and more are available. It doesn’t matter whether you use individual shares, ETFs, options or other forms for your investment.
- A distinction based on regions is also conceivable. In addition to the European and US economic areas, Oceania, Asia and other regions also offer interesting investment opportunities.
So you see: a portfolio can mean many different things! Today, we want to take a closer look at ETF portfolios. As the name suggests, they consist exclusively of exchange-traded funds. But which products should you add to your portfolio and why?
Good to know:
An ETF portfolio describes the portion of your finances that you have invested in exchange-traded funds. Of course, you don’t have to put all your capital into these products and can also maintain a stock portfolio, P2P portfolio, real estate portfolio, etc. at the same time!
More security with ETFs
High profits are possible on the stock market, but there is always a risk involved. Crashes, recessions or simply bad luck in the selection of securities can lead to the loss of some of your capital. In the worst case, stocks or ETFs can result in a total loss!
Therefore, a healthy dose of caution is advised with any investment. The simplest way to avoid these risks is to allocate your money correctly. This also allows you to spread the risk. If an investment product performs less well than expected or even generates a loss, the damage will be limited because it only represents a small portion of your portfolio.
With exchange-traded funds, you can take this concept to the extreme. A typical ETF portfolio can contain hundreds of stocks, commodities, bonds or cryptocurrencies. If a company, cryptocurrency or other asset does not perform as planned, it hardly matters.
Your ETF portfolio will nevertheless remain profitable. Unfortunately, this logic also works the other way round: a very good result for a single stock in one of your funds will only slightly increase your return.
If a genuine crisis were to occur, most of your investments would also plummet. You would then have to wait for prices to recover. However, this problem arises with every exchange-traded product, not just when investing in ETFs.
Overall, an ETF portfolio is a fairly safe investment because it offers “natural diversification”. However, choosing the right funds is always crucial! In the next step, we will look at how to find a sensible combination and give you some useful ETF portfolio recommendations!
How to build a successful ETF portfolio: recommendations and strategy
Before we look at some typical ETF model portfolios, let’s discuss the basics of a sensible investment strategy with a special focus on exchange-traded index funds. The key points here are risk, goals and your other investments.
1. Risk
A look at the ‘magic triangle of investing’ shows that an investment with the potential for high returns and high liquidity (you can sell your investments in a very short time) must automatically involve a certain amount of risk.
The term ‘risk’ sounds dramatic and scares off many investors. However, the dangers can be minimised (for example, by diversifying an ETF portfolio) or completely avoided through hedging. Ultimately, the possibility of earning less profit than hoped for is unfortunately part and parcel of every investment.
It is always important that you
- are aware of the risks.
- Only take on as much risk as suits you and your capabilities.
A sensible first step when putting together your ETF portfolio is therefore to consider your personal risk tolerance. If, for example, you have sufficient capital available and are not directly dependent on your returns, you can also choose risky financial products.
Possible assets for a risk-tolerant ETF portfolio could include emerging market ETFs, crypto ETFs or a financial sector ETF.
However, if you only have a small amount of money available or are more dependent on the success of your investments (for example, because you have a family to support), you should also be more cautious when trading on the stock market. In this case, an ETF for consumer staples, government bond funds or a gold ETF would be suitable.
However, the classic choice for low-risk investing is undoubtedly a global ETF. I have summarised the most interesting products in this category in my article “Best MSCI World ETF”.
2. Your goals
The second important question you should ask yourself when creating an ETF portfolio is: What do I want to achieve with my investment? The answers can vary greatly! Perhaps you want to buy or build a house in a few years, supplement your pension or achieve complete financial freedom through passive income.
Of course, you don’t have to set your goals so high. ‘Have a few extra pounds each month in the long term’ or ‘I want to invest my money wisely and decide later what to do with it’ are perfectly adequate.
Once you have defined your plans, you can select the appropriate investments for implementation. This is where you decide whether a suitable ETF should be accumulating or distributing and what investment horizon is appropriate. For very long-term wealth accumulation, for example, a global ETF makes sense.
A German fund can also yield good results in the long term. With such products, you are following a similar concept to the planned share pension.
For shorter periods, many investors aim for higher returns to make a short investment worthwhile. However, bear in mind that this also increases your risk! If you only want to invest your money temporarily and very safely, a call money account may be more suitable than an ETF portfolio. In this case, it may be worth securing the current ING DiBA bonus!
3. Other investments
Another important aspect to consider when putting together your ETF portfolio is what other investments you already have or would like to make in the future. For example, if you have a lot of volatile stocks or have invested a lot of capital in P2P lending, you already have a fair amount of risk in your finances. In this case, a safer ETF is a good choice.
If, on the other hand, you are just starting your financial career with an ETF portfolio (a very good choice thanks to its natural diversification and low costs!), you can choose a mix of safe and riskier index funds. Your ETFs should therefore fit in with your overall portfolio.
ETF portfolio examples: my recommendations
I have put together a sample ETF portfolio for you below. These are proven concepts that are particularly impressive due to their simplicity: overly complex strategies often backfire and can achieve the opposite of the desired results!
Good to know:
Please note that this is not investment advice! I am simply presenting a few concepts; you must do the necessary research yourself to make a suitable selection or consult a qualified financial advisor!
Once you have found a strategy that suits your goals and capabilities, or have put together your own approach, you are ready to get started. If you do not yet have a brokerage account, now would be a good time to open one. I would recommend taking a look at my report on Scalable Capital vs. Trade Republic and my broker comparison.
ETF Global Portfolio
As the name suggests, a global portfolio should reflect the entire world. In practice, this is not 100% possible, but you can come very close to this goal with exchange-traded funds! There are several ways to implement this.
The simplest option is to use an MSCI All Country World or FTSE All World index fund. Both indices contain thousands of stocks from industrialised and emerging countries. You can build a very diversified portfolio with just one of these ETFs. This is why it is also referred to as a ‘single ETF portfolio’.
The MSCI ACWI UCITS from iShares tracks the MSCI All Country World Index, giving you access to stocks from 47 countries.
For a little more flexibility, it makes sense to divide your investments manually into industrialised countries and emerging markets. You can cover both areas with one fund each and strike any balance you like. For example, you could use an MSCI World Fund for industrialised countries and an ETF based on the MSCI Emerging Markets Index for emerging markets.
Xtrackers MSCI Emerging Markets UCITS offers you access to stocks from emerging markets.
Of course, this division can also be made much more granular. How about, for example:
- a fund based on the S&P 500 for the US market (please note: these are almost always swap ETFs!),
- an ETF based on the Stoxx Europe 600 to cover Europe
- an MSCI Emerging Markets-based fund for emerging markets
The Amundi Stoxx Europe 600 UCITS is ideal if you want to benefit from the European economy. It contains 600 stocks from EU
A possible allocation in this case would be 40% – 30% – 30%, which also gives this ETF portfolio its name (40-30-30 portfolio).
Interesting:
Did you know that the average investor achieves a lower annual return than the US stock index S&P 500? The main reason for this is that many amateurs try to outperform the market. However, those who are satisfied with the growth of the global economy can invest successfully and stress-free.
Dividend portfolio
Relying on regular profit distributions is a popular method on the stock markets, which can also be implemented with exchange-traded funds. With most indices, you have the choice of whether an ETF should be accumulating or distributing. Simply select the latter option and you can look forward to cash payouts.
However, this works even better with special dividend ETFs, where the focus is on distribution. A fund based on the S&P Global Dividend Aristocrats or the FTSE All-World High Dividend Index is ideal for this. You can also find attractive profit sharing opportunities among REITs. I have taken a closer look at some of these real estate ETFs for you.
Vanguard’s FTSE All-World High Dividend Yield UCITS offers you access to stocks from around the world that offer high dividend yields.
Bonds are also a popular asset class for dividend hunters. Although strictly speaking they are not dividends but interest payments, the regular payments fit well into a distribution-oriented ETF portfolio.
The EUR High Yield Corporate Bond is an interesting index for corporate bonds from Europe, while the USD Corporate Bond covers US companies. ETFs that use these two indices as benchmarks have consistently delivered very good results.
Before deciding on a dividend portfolio, however, you should consider a few points:
- It doesn’t matter how often an investment product pays out. The only thing that matters is the total return per year! ETFs with monthly dividends therefore offer no financial advantage, but they can have a positive effect on your mental well-being: it’s simply fun to see a few extra pounds in your account every month!
- Some dubious financial portals claim that accumulating and distributing ETF have the same total return. This is not correct! Due to different taxation (flat-rate withholding tax for accumulating funds, withholding tax for distributing funds), accumulating products have an advantage. This means that you have to pay slightly more for an ETF-based dividend portfolio than for comparable products without distributions.
- Dividend funds are worthwhile from the first payout, while accumulating products only generate returns when sold at a later date. So if you want to benefit directly from your capital, distributing ETFs are a good choice.
All Weather ETF Portfolio
The All Weather Fund from hedge fund Bridgewater Associates is one of the most successful financial products ever. You can easily replicate this fund in a simplified form as an ETF portfolio and benefit from similar advantages. This All Weather ETF portfolio is characterised by particularly low risk.
As the name suggests, this investment strategy will help you weather any storm – including stock market crashes and major crises. The basic concept is to spread the risk across different asset classes, each of which reacts differently to problems.
For example, the stocks held would lose value dramatically during a crash, but government bonds would gain value at the same time. The original All Weather Fund uses varying weightings, leverage and precise analysis of market phases to provide almost complete protection against such events.
When implementing index funds, we take a simpler approach and merely replicate the asset class allocation. This means that we do not achieve the almost 100% security offered by the original, but you can still expect a high level of protection against crises.
Here is the distribution of the All Weather Fund and Exchange Traded Funds that you could use for implementation:
- 30% U.S. stocks: Accessible through an index fund based on the S&P 500.
- 40% long-term government bonds: Any ETF based on the ICE US Treasury 7-10 Year Index or the ICE US Treasury 20+ Year Index would be suitable.
- 15% medium-term government bonds: ETFs based on the ICE US Treasury 3-7 Year Index are suitable here.
- 7.5% raw materials: The Bloomberg Roll Select Commodity Index or the Bloomberg Commodity Index, for example, are suitable as a basis for an ETF.
- 7.5% gold: A wide range of ETCs (exchange-traded commodities) is available here.
Access to medium-term US bonds is possible, for example, via the USD Treasury Bond 3-7yr UCITS from iShares.
As you can see, this portfolio strategy is almost entirely focused on the US market. To achieve even better diversification, you could also break up this regional concentration. For example, replace US stocks with an MSCI World-based fund and you will immediately have significantly more countries in your portfolio. The bonds included can also be mixed well with securities from different countries.
Conclusion: An ETF portfolio is worthwhile – but recommendations must suit you and your goals!
A good mix of exchange-traded funds is a very lucrative investment. But which securities should you add to your portfolio? There are many different strategies and approaches here. The most important questions to ask yourself are always: How much risk can you bear? What are your financial goals? And what other investments do you already have?
Those who react badly to temporary price slumps and want a high level of security might be well advised to consider the All-Weather Strategy, for example. A so-called ‘world portfolio’ also offers a healthy degree of protection, as you are betting on the performance of the global economy as a whole.
With a dividend portfolio, on the other hand, regular distributions are the main focus. There are also hundreds of other approaches. With your ETF portfolio, you can also take on significant risks and potentially generate substantial gains – or lose a considerable amount of money.
Overall, however, funds are considered a relatively safe investment, as you acquire a variety of assets (stocks, commodities, cryptocurrencies, etc.) with a single purchase. They are therefore particularly suitable as a stable foundation for long-term wealth accumulation and less suitable for speculation.
Are you looking for the ideal index fund? I have found the best ETFs for you!
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