Building an Investment Portfolio with ETFs

Exchange traded funds (ETFs) are growing rapidly in popularity among investors. This is because they offer a measure of diversity at low cost. ETFs often cost much less than mutual funds in terms of load fees and administrative fees. (However, it is important to note that ETFs do incur normal stock trading and transaction costs.) Additionally, because ETFs are a collection of shares, they can offer a certain amount of instant diversity. While many investors are thinking about adding an ETF or two to their investment portfolios, many fail to understand that it is possible to create an investment portfolio entirely composed of exchange traded funds.

ETFs and asset allocation

Asset allocation is an important consideration when buidling an investment portfolio. Asset allocation is the way you divide your portfolio up into different types of investments. For the most basic of investment portfolios, assets are usually divided between stocks and bonds. Some of the more adventurous may add commodities, real estate and/or currencies to their investment portfolios. The percentages of each are known as asset allocation.

When building an all-ETF investment portfolio, you choose ETFs that focus on different assets. In fact, nearly every kind of asset has an ETF attached to it: stocks, bonds, commodities, currencies and even real estate. There are even cash ETFs if you are interested in going that route. This means that you can get low-cost ETFs to build an investment portfolio that includes just about anything you want.

The most basic investment portfolio is one that is 70% stocks and 30% bonds. There are a number of stock ETFs that you can include, from a number of brokerages. You can make your stock allocation up of less volatile ETFs (stocked with "value" stocks and even make use of index ETFs), or you can search out "growth" ETFs that offer more risk. Some investors choose to use 2/3 of their stock investments for "safer" and more stable stock ETFs, and add a little more growth and risk with 1/3 of their stock allocation in stocks that offer the chance of higher returns. The remaining 30% is often put in bond ETFs.

If you want to add a little more growth to your investment portfolio, you could reduce your asset allocation in either stock ETFs or bond ETFs. Some believe that you can take a stock allocation of 60% and a bond allocation of 30% and put the remaining 10% in something else. Here is a sample ETF portfolio that takes a slightly riskier asset allocation (for younger investors):

If you want to buy 10 ETFs and do 60% stocks, 20% bonds and 20% others, you might consider:You might replace a currency or commodity ETF with a real estate ETF. Or, if you wanted more safety, keep 3 bond ETFs and add a cash ETF.

• 5 stock ETFs that offer stability and lower risk (indexes, blue chips, etc.)
• 1 stock ETF that offers growth (clean energy, small cap, etc.)
• 2 bond ETFs
• 1 commodity ETF
• 1 currency ETF

There are any number of options when you create an investment portfolio from ETFs. There is potential for tax savings and other savings when you make an all-ETF portfolio.

Disclaimer: I am not an investment professional. This should not be construed as investment advice. All investment carries the risk of loss. Before investing, do your own research and/or consult with an investment professional.