A Complete Guide to ETF Portfolio Strategies
Investments can be quite intimidating when an investor is required to streamline many options yielding the same amount of returns. However, investing is not overly complicated if you strategize and invest in the right investment portfolio mix. Choosing the right blend of optimal investment portfolios help in accomplishing your long-term financial goals. ETFs provide such a versatile investment portfolio that most of the investors look forward to.
ETFs (Exchange-Traded Funds) are versatile stocks or bonds, much like mutual funds that involve a collection of various other securities like currencies or even commodities like gold bars. The pool of stocks or bonds is also invested in any number of sectors or various portfolio strategies. ETFs are a blend of mutual funds, bonds, or stocks with the only exception that much unlike individual stocks, ETFs can be traded in a stock exchange throughout the day.
Choosing the right blend of exchange trade fund portfolio guarantees instant diversification. For example, purchasing an exchange-traded fund portfolio that tracks a financial services index gives an investor ownership over a wide range of diversified financial stocks or bonds instead of one single stock. Investing in an Exchange-traded fund portfolio also guards against the risk of volatility up to a certain extent when stocks within the ETF fall. This advantage of risk elimination is the reason why most of the traders are more inclined towards ETFs rather than on any other stocks.
Another benefit that investing in ETFs gives to the traders is the exposure to alternative assets other than stocks or bonds or mutual funds, e.g., commodities, currencies, or real estate.
However, choosing the right blend of stocks requires considering some important points. Some of the points are discussed in detail:
1) ETF Composition
Before investing in a particular exchange-traded fund, the traders must look into the composition of that ETF. For example, some ETFs may have only water-related stocks, while others may have only infrastructure stocks as their top holdings. Therefore, each ETF strategy should be chosen depending on individual traders’ financial obligations and risk tolerance levels; each portfolio of etfs is based on their niche sectors’ individual approaches. Also, the returns from each ETF would depend on the individual industry sectors where they operate.
2) Past Performances
Though the ETF’s past performances are not indicative of how they will perform in the future, it gives some idea about the scope of operations of a particular ETF. Therefore, it becomes a routine task of the traders to compare how similar ETFs have performed in the past. Though most of the ETFs have low fees, the main difference can be found in their varying expense ratios that can make a particular ETF costlier than the others.
An ETF with low levels of AUM (assets under management) has the danger of early liquidation, which is a situation that traders dread. Therefore, before investing in an exchange-traded fund, they should be aware of the daily average volume, and the bid or ask the spread of an individual ETF. Low volume indicates low liquidity that makes it very tough for the traders to get in and out of the portfolios.
Nowadays, many advisers recommend low-cost index strategies that can help streamline the traditional portfolio construction efforts, and simultaneously focus on business development needs and client relationships. Vanguard ETF portfolio is such an ETF portfolio strategy that suits a wide range of client risk and return profiles. The ETF portfolio offers a highly cost-effective way of gaining broad market coverage across a wide range of assets.
Vanguard’s ETF Investment Strategies
Vanguard portfolio ETF strategies are developed to meet the financial needs of a wide range of traders. 4 ETF investment strategies are discussed hereunder that have the potential to cater to the need of both the most conservative investors and also those with a longer time frame and greater exposure to assets.
1) Conservative Portfolio Strategy
As the name suggests, the Conservative Portfolio Strategy is best suited for conservative traders with a minimum time frame of 3 years. 70% of the invested funds go to the income-oriented asset classes, and the remaining 30% is allocated to growth-oriented assets. Therefore, this strategy proves to be of immense help for traders seeking a steady income source with steady capital growth. This strategy is developed mainly for those investors who have a low-risk tolerance level. Traders who seek a relatively stable income even if that means very low profitability find this strategy very helpful; though the returns are less, they will benefit from the tax advantages.
2) Balanced Portfolio Strategy
As the name suggests, these funds strategy is meant for those investors who seek a proper balance between their incomes and capital growth potential. Investors with a minimum time frame of 5 years can find this strategy very helpful. The strategy balances its targets between income-oriented assets and growth-oriented assets in the ratio 1:1.
3) Growth Portfolio Strategy
The growth portfolio strategy is developed for those investors who prefer a more diversified portfolio with long-term capital growth that is biased towards growth-oriented assets rather than income-oriented assets. The minimum time frame for this strategy is seven years. As such, the strategy allocates 70% of its resources towards growth-oriented assets and only 30% towards income-oriented assets.
4) High-Growth Portfolio Strategy
It is similar to growth portfolio strategy, and as such, both are meant for investors with a time frame of 7 years or more and are more biased towards growth-oriented asset classes. As such, this strategy allocates 90 % of its total resources towards growth-oriented asset classes and only 10% towards income-oriented asset classes. Investors with a very high-risk tolerance level can find this strategy useful to create a diversified ETF portfolio. All these 4 ETF investment portfolios are meant for investors seeking a tax-effective investment. Some other popular ETF portfolios that give tax benefits to the traders are discussed hereunder. Tax benefits imply that the returns received from ETFs are not taxable under the tax laws of a country.
Other ETF Portfolios
ETFs are ideal for first-time investors because of the manifold investing benefits that they offer, like low expense ratios (owing to their passive management), abundant liquidity, diversification, and a wide range of investment choices, low minimum investment, and so forth. Some of the best portfolios of ETFs that give tax benefits are listed below.
1) Buy and Hold Strategy
This is the simplest ETF portfolio strategy that depends on the traders’ willingness to decide whether or not they want to stick with the same investment vehicle throughout. Buying and holding ETFs or other stocks allows the traders to reap the benefits of low costs, pound-cost averaging, and much higher compound interest. Therefore, the investor needs to know when it is the right time to release the ETFs in the market.
However, this strategy is also nor free from drawbacks. It needs the investor to be very patient and have a stoic like behavior, which means the traders should know how to be indifferent when the stock markets are down instead of panicking and releasing all their holdings out of fear. Likewise, when a new asset comes in the market, the traders should not jump into buying that; instead, they should hold on to the curiosity to gauge how the asset is performing. This strategy is very simple but hard to stick to in real life.
This strategy is built on diversified securities like equities or bonds, but at the same time, it allows for active forays that provide higher returns. The core-satellite strategy mostly consists of equities and bonds and is quite similar to the Buy and Hold strategy. It allows the traders to select their preferred securities or bonds from the broadly diversified ETFs.
The satellites then focus on the opportunities available in the emerging markets that can meet the investors’ preferences. The core-satellite strategy helps the investor to earn higher returns on their investments and protect their investments from market fluctuations. Those investors who do not mind deviating from their core investment choices can try this strategy.
3) Trend following
As the name suggests, this strategy follows the successful market trends and uses already established “data-driven” rules or ‘buying signals’ to determine whether the traders should buy or sell in the given market at any given time. It is the most active ETF portfolio strategy that depends on the proper market timing. This strategy follows the most trending trade signals to predict the perfect time to buy and sell securities or ETFs. Signals like the 200-day moving average price of an index are popularly used by traders to predict ETF trading’s perfect time. If the current level of an index reaches above the 200-day moving average mark, then it signifies that it is time to buy more of that index (maybe S&P 500 or FTSE). This time is perfect for the market momentum to rise, and eventually, the investors can earn some extra profits from this.
On the contrary, if the index price falls below the 200-day moving average, then it implies the time to sell out the equities.
The trend-following strategy works best in the long term, but it has to tackle many false signals in the short term, which, if left unnoticed, may lead to serious financial damages to the investors.
Sometimes the traders mix and match these three strategies and formulate their bespoke strategy to gain over the wider market coverage.There are many other ETF investment strategies, but they are not suitable for first-time investors, as they require highly expensive financial data and computation beyond the average traders’ affordability. There are strategies like Dollar Cost Averaging (DCA), Swing Trading, Asset Allocation, short selling, sector rotation, hedging, Value at Risk (VAR), etc. All these are examples of investment strategies having high entry barriers.
1) What is the best ETF Portfolio?
Vanguard ETFs are amongst the best investment portfolios that the traders can buy and hold confidently.
2) How do I build an ETF portfolio?
To build an Exchange-traded fund portfolio, it needs due consideration of the following points.
- Keeping expenses low to boost up the net returns from exchange-traded funds
- Avoiding Exchange-traded funds having low asset values
- Checking out the dividends the company is providing
- Avoiding long term bonds
3) How many ETFs should you have in your portfolio?
It would depend on the investors’ financial objectives. However, owning 6 to 10 ETFs can provide adequate diversification of assets.
4) What is an ETF Model Portfolio?
ETF Model Portfolios are a broad collection of diversified model portfolios that use a passively managed investment framework for offering a low-cost market exposure through ETFs.