Quarterly Outlook
Upending the global order at blinding speed
John J. Hardy
Global Head of Macro Strategy
Saxo Group
Investors face the constant challenge of balancing growth potential with risk management. ETFs are a diversified way to invest, but putting together an entire portfolio made up of ETFs, can offer an even more effective way to diversify. With their low costs and access to a wide range of markets, ETFs may help you to improve your financial strategies, while maintaining flexibility.
Exchange-traded funds (ETFs) allow investors to own a collection of assets—such as stocks, bonds, or commodities—within a single fund. They trade on stock exchanges like individual shares, combining the ease of buying and selling with built-in diversification.
This makes ETFs an appealing option for anyone considering simplifying their investment approach while gaining broad market exposure.
ETFs stand out as an investment choice due to their distinct advantages:
Diversification is essential for managing risk and achieving stability in an investment portfolio. It spreads investments across various sectors, geographies, and asset classes and minimises the impact of any single asset's poor performance.
Diversified ETFs simplify this process by offering instant exposure to a wide range of holdings. For instance, a global equity ETF provides access to companies from multiple countries, while multi-asset ETFs combine stocks, bonds, and other securities in a single package.
By investing in diversified ETFs, you reduce unsystematic risk, which is the risk specific to individual securities or sectors. This strategy ensures that losses in one area are offset by gains in others, stabilising overall portfolio performance. For example, when technology stocks underperform, gains in consumer goods or healthcare stocks might help balance the portfolio.
Diversification also increases your opportunities for growth. Spreading investments across emerging markets, developed economies, and various industries allows you to benefit from different growth cycles. For instance, while the US market might slow, emerging markets could show strong returns, ensuring consistent portfolio growth.
ETFs designed for even more diversification, such as all-world equity ETFs or sector-balanced funds, provide an accessible and cost-effective way to achieve this balance. These tools cater to both beginners who want simplicity and experienced investors looking to refine their existing strategies.
Creating a diversified ETF portfolio requires an approach that aligns with your financial goals, risk tolerance, and investment timeline. Below are the steps and strategies to consider:
Setting clear objectives is a must. Determine what you want to achieve, such as retirement savings, wealth growth, or generating passive income. Next, evaluate your risk tolerance to ensure your portfolio balances potential returns with your comfort level in market fluctuations.
Asset allocation divides your portfolio among different asset classes like stocks, bonds, and alternatives. The balance depends on your financial goals and time horizon:
Several approaches can help you structure your diversified ETF portfolio:
Focus on ETFs that offer:
Rebalancing is crucial to maintaining your desired allocation as market conditions change. Use one of these methods:
Diversified ETF portfolios can be structured in a way that suits varying risk tolerances and investment goals. Here are three examples that show how you might construct an ETF diversification portfolio by category to match your needs:
This approach focuses on minimising risk while preserving capital. It is well-suited for investors with short time horizons or those nearing retirement.
This structure prioritises income generation and protection against significant losses.
Balanced portfolios aim to strike a middle ground between growth and risk. They are ideal for investors with moderate risk tolerance and medium-term goals.
This blend offers exposure to growth opportunities while reducing volatility.
An aggressive portfolio targets high returns over a long investment horizon, making it suitable for younger investors with a higher risk appetite.
While this portfolio promises higher returns, it also potentially comes with increased volatility.
Even the most carefully crafted ETF portfolios can falter if common mistakes are overlooked. Here are some pitfalls you should avoid when building a diversified ETF portfolio:
Relying heavily on a single sector or region exposes your portfolio to unnecessary risks. For example, an over-concentration in technology stocks may lead to significant losses during an industry downturn. Instead, balance your portfolio by including ETFs covering different sectors and regions.
High expense ratios and trading fees can erode returns over time. Always select ETFs with low costs, especially when comparing funds tracking the same index. And make sure to watch for hidden fees, such as high bid-ask spreads that might affect the profitability of your trades.
Choosing multiple ETFs with similar holdings dilutes diversification. For instance, owning both an S&P 500 ETF and a total US market ETF often results in duplicate exposure. Use portfolio analysis tools to identify overlap.
Basing investment decisions solely on past performance often leads to buying high and selling low. Focus on long-term suitability rather than short-term trends to avoid unnecessary risks and disappointment.
Neglecting to rebalance can cause your portfolio's risk profile to drift. Regular reviews ensure your allocations remain aligned with your goals, preventing unintended exposure to volatile assets.
A diversified ETF portfolio offers a practical way to grow wealth while managing risk effectively. That's because ETFs provide access to a wide range of markets, making them an excellent choice for both new and experienced investors. With their low costs and flexibility, they let you tailor your investments to match your financial goals and risk tolerance.
True success lies in creating a balanced portfolio that reflects your objectives, choosing ETFs carefully, and reviewing your strategy regularly. This way, you can build a portfolio to deal with market fluctuations and support your long-term goals.
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