Contents
ETF Fundamentals
Why Invest in ETFs?
Stock ETFs
Fixed-Income (Bond) ETFs
Real Estate (REIT) ETFs
Commodities ETFs
How to Build a Balanced Investment Portfolio with ETFs
How to Build a Portfolio with ETFs and Other Types of Investments
How to Buy ETFs for Your Portfolio
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Previous: How to Build a Balanced Investment Portfolio with ETFs |
Next: How to Buy ETFs for Your Portfolio |
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How to Build a Portfolio with ETFs and Other Types of Investments
Though it’s possible to build a balanced portfolio exclusively with ETFs, sometimes it helps to mix ETFs with other investments, such as mutual funds or—if you’re an experienced investor and are comfortable with the risks—individual stocks and bonds. The two most common reasons to buy investments other than ETFs are:
- Selection: You may be interested in investing in a sector or type of investment for which no ETF exists.
- Dollar cost averaging: Buying ETFs in stages is often impractical, as shown in the example below.
An Example of When Not to Buy ETFs
Let’s say you’re an aggressive (high risk tolerance) investor with $100,000 to invest who’s looking to buy investments for the large-cap stock portion of your portfolio. Since large-cap stocks make up the largest percentage of your portfolio (30%, or $30,000 in this case), this allocation will be your most substantial investment. As such, you should probably make this investment in stages, with dollar cost averaging, rather than all at once. You have three main choices in making this investment:
- Buy individual large-cap stocks: This option is too risky for most investors. It also requires significant time to research each company, and expense—you’ll pay commissions for each stock you buy (and later sell).
- Buy a large-cap stock ETF: This is likely a better option than buying individual stocks, but you’ll pay a commission every time you buy (and, eventually, each time you sell).
- Buy a large-cap index mutual fund: This is likely your best move in this case. Most index funds have expense ratios only slightly higher than comparable ETFs, but don’t charge commissions to buy or sell. For instance, Vanguard’s Large Cap Index Fund® (symbol: VLACX) has an expense ratio of 0.20%, just 0.13% higher than that of the Vanguard Large Cap ETF® (symbol: VV).
Exceptions to this Strategy
In some cases, it still might be best to buy an ETF rather than an index fund, even if you’re dollar cost averaging. For instance, if you’re trading online, you might pay as little as $7 per trade to buy an ETF. That means it might cost you $42 or so to dollar cost average up to your total investment amount. Over the long term, you’ll almost certainly make up for that one-time $42 expense by buying an ETF with an expense ratio that’s lower than that of a comparable index fund—
even if the difference is as little as 0.13% or so.
| Acknowledgments & Disclaimer |
