How do you create an ETF portfolio?

While you need to be mindful of the current economic climate when considering which of Australia's 240-plus ETFs to invest in, you also need to keep one eye on the horizon - as it's over the longer term that your best returns will be achieved.
By · 28 Jan 2021
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28 Jan 2021 · 5 min read
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Given that the performance of different asset classes is typically uncorrelated – meaning the outperformance of some assets, markets or sectors offsets those that underperform – by choosing a broad mix of ETFs, you’ll smooth out performance risk and protect your portfolio from volatility shocks.

It’s equally important when creating an ETF portfolio to A) avoid those with unjustifiably higher fees, and B) those that for whatever reason, have failed to attract sufficient fund inflow required for their long-term sustainability.

With that in mind, here are some pointers to consider when creating an ETF portfolio from the burgeoning variety now available.

De-risk through diversification

There’s nothing to stop you combining a handful of direct ETFs, each targeting different asset classes, like fixed income (and bonds), shares, or property (and infrastructure) - and/or within different markets or sectors - to achieve the mix of growth and defensive assets you’re looking for.

However, given that you’ll incur multiple sets of fees and transaction costs when buying or selling, plus the added complication of managing these funds yourself, buying multiple ETFs isn’t necessarily the smartest way to create a diversified ETF portfolio.

Match your investment goals and timelines

A simpler and cheaper alternative to creating an initial ETF portfolio is through a single ETF trade. The best way to identify the mix of four main asset classes – equities, fixed income, property, and cash – that’s right for you is to ask yourself when you want to achieve your financial goals.

If you’ve got less time to deliver on your goals, your appetite for risk will be lower. As a result, your ETF portfolio will include a more conservative basket of assets, focusing more on defensive assets, like cash and fixed income (or bonds), and less on growth (~aka risk) assets like shares.

If you have many goals spread over numerous time-frames, then a multi-ETF strategy could be right for you. But if you only ever plan to own one ETF, then more often than not a balanced portfolio – split between defensive and growth assets - will be your best option.

InvestSMART solutions to match your investment horizon

Like the idea of creating your own ETF portfolio, but not sure where to start: Consider one of the four model ETF portfolios within InvestSMART’s product suite?

Each ETF, including Conservative, Balanced, Growth and High Growth invests in (and professionally manages) a mix of ETFs – which based on their underlying assets, markets and sectors – are designed to reflect your chosen investment horizon and risk appetite.

Regardless of which portfolio you choose, you’ll receive total returns, including both growth and income through the right mix of both higher and lower risk assets.

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