ETFs You need to have in your Portfolio!
Image by Markus Winkler
What is an ETF?
An ETF is an exchange-traded fund, which is a basket of assets. Imagine a basket which includes Apple, Microsoft, Tesla and Amazon stocks, that’s an ETF, so when you purchase that ETF, you have a piece of all those stocks. ETFs provide great investment options because they are traded on the stock market like any stock, they offer great diversification which would help spread risk, as well as being low cost.
Why You Should Have an ETF Portfolio
ETFs have become increasingly popular due to how easy it is to manage in an investment portfolio, being low cost compared to other index funds and the diversification it offers. On the other hand, it’s popular because research has shown that passive investing seem to outperform active investing in the long run. This is based on the premise that nobody can really time the market and so the percentage of fund managers that outperform the market is less than 1%, also coupled with the high costs of management. Therefore, it makes sense to invest in broad market ETFs that track the stock market, where you are sure of an average yearly growth of 7-9%. Additionally, most people do well with passive investing as they don’t have the time to research individual stocks and assets before purchasing, which makes this a great option.
How to Pick an ETF
Picking an ETF is not as tedious as deciding to buy a particular stock. There is always more than one ETF that tracks a similar index and generally speaking you can’t go wrong with picking anyone from whatever category of ETFs you want.
However, here are the things to note when comparing ETFs. We will compare three ETFs that track the S&P 500 as we go through this analysis: SPY, IVV and VOO.
Purpose of the Fund:
Before you start comparing ETFs, ensure you pick similar ETFs that have the same purpose. For instance, if we are comparing ETFs that track the S&P 500, it would be out of place to include QQQ in the comparison which tracks the Top 100 non-financial companies on the Nasdaq.
Management Expense Ratio:
These are fees investors are charged for buying any fund, it is used to cover the cost of operating the fund. The MER for the ETFs we are comparing are as follows:
SPY: 0.09% || IVV: 0.03% || VOO: 0.03%
We can see that SPY is more expensive than the remaining two, which may discourage you from SPY.
Dividend Yield:
Another thing to check is the dividend yield on the funds and ensure it aligns with your investment goals. Dividend yields for all three ETFs are in the same range of 1.4% - 1.7%, mirroring the S&P 500 Index. Also, remember the expense ratio for SPY is higher which would affect the net dividend yield for that fund.
Holdings:
Knowing what companies the fund holds is very important. Check that investing in those companies aligns with your investment goals. Likewise, check that you want to be invested in those industries and are comfortable with their weightings. For instance; VOO and IVV have the exact same top 10 companies and their industry weighting is very similar compared to SPY which is slightly different but still similar.
Fund Performance:
You don’t want to pick a fund that doesn’t seem to have a good performance track record in a long run because that negates the purpose of investing. Remember, the stock market is full of ups and downs, still, it tends to move upward in the long run.
Market Price:
Knowing the market price is essential to determine if you can afford to purchase a stock. However, in recent times, it may not matter because you can buy fractional shares on platforms like Wealthsimple.
All of these details on the fund can be found on the fund website.
Tip; Ask Chatgpt to compare and analyze the funds for you, let’s take passive investing to another level!
Let's Build Your ETF Portfolio
* NB: I have only included ETFs listed on the Toronto Stock Exchange. If you don’t live in Canada, search for the equivalent ETF listed on your country’s Stock Exchange
When building your ETF portfolio it’s easy to have a lot of overlaps with the ETFs you pick. To avoid that and have a diversified portfolio, here are things to do;
Decide the Number of ETFs in your Portfolio
Do you want a one-fund ETF portfolio or have more than one ETF?
I recommend having between 4-5 ETFs in your portfolio for a well-balanced and diversified portfolio.
One-fund ETFs track the total global market and require less management. If this aligns with your investment goals, here are some to check;
Understand your Risk Level
This is very important for picking the ETFs you want in your portfolio. There are two ways to evaluate this: your age range and risk tolerance. If you're a younger investor, you can typically afford to take on more risk and focus primarily on investing in equity ETFs. For someone nearing retirement, it's advisable to have a diversified mix of equities, fixed-income, and bonds within an ETF. On the other hand, If you're a younger investor with a lower risk tolerance, you can also stick with ETFs having a mix of equities, fixed-income and bonds.
Choose ETFs Based on These Criteria
I recommend having ETFs that track the US Market, your Home Base Country and the International Markets.
US Market ETFs
The US Stock Market is one of the biggest stock market with some of the highest-performing companies. It’s always a good place to start investing wherever in the world you are in. You can do this through ETFs that track the S&P 500 or US total market.
Here are some all-equity US Market ETFs;
Here are some US Market ETFs with a mix of assets (equity, fixed-income, bonds);
ZBAL || XBAL || XGRO || VBAL || VGRO
Home Base Country ETFs
There’s something called the home base advantage when it comes to investing. It means investing in companies in your home country because you live there and have the advantage of knowing the well-performing companies. It doesn’t mean that you would earn more on your investments. I always recommend sticking to ETFs that track the top-performing companies or industries.
If you live in Canada, here are some ETFs you can explore;
International Market ETFs
These types of ETFs are often overlooked because investors tend to gravitate toward the highest-performing countries. However, focusing solely on top performers does not ensure a fully diversified portfolio. Historical performance shows that the leading countries are not consistently the best in terms of returns. During downturns in top-performing regions, international markets can outperform, offering investors growth opportunities. I recommend having ETFs in both Emerging Markets and Developed Countries outside of North America.
Here are some emerging markets ETFs to check;
Here are some developed market (excluding North America) ETFs to check;
Once you pick ETFs from these categories, consider adding an ETF that tracks an industry of interest, such as AI, Pharmaceuticals, Crypto, or Real Estate. I recommend you limit your investment in this industry-specific ETF to no more than 10% of your overall portfolio. However, remember that it is not necessary to include this type of ETF, and you can keep your portfolio focused with just 4 ETFs.
I hope you enjoyed reading this and it has been a good crash course on ETF investing. Now go and buy that first ETF!
* NB: I have only included ETFs listed on the Toronto Stock Exchange. If you don’t live in Canada, search for the equivalent ETF listed on your country’s Stock Exchange
