How to Build a Portfolio with ETFs

Building a portfolio typically involves allocating a certain percentage of investing dollars across various asset classes such as stocks, bonds, and cash. 

Additionally, it's important to consider diversifying your portfolio by distributing investments across subclasses within major asset classes such as various stocks sectors and bond types. 

Exchange-traded funds, or ETFs, are one investment vehicle that can be used to help accomplish both portfolio allocation and diversification. 

An ETF, like a mutual fund, is a pool of money invested in a number of different securities. There are ETFs for many asset classes including stocks, bonds, commodities, and even currencies. 

There are equity ETFs that focus on specific asset types like small, mid, and large-capitalization stocks, or on specific sectors like health care, technology, and industrial stocks.

ETFs that focus on a specific asset type or sector carries certain risks. Even if an ETF owns various types of stocks, if the asset or sector drops, the ETF will fall with it. This is why asset allocation is so important. 

ETFs commonly invest in only one asset class. Therefore, to help achieve a well-allocated portfolio, you may want to consider investing in multiple ETFs from different asset types. 

For example, you could invest in a mixture of equity ETFs, fixed-income ETFs, and commodity, real estate, or currency ETFs. 

But remember, asset allocation is just the start of creating a portfolio. It's also important to think about diversifying across subclasses within major asset classes. 

So the stock allocation of your portfolio may be divided up among large-cap, mid-cap, and small-cap stocks or across various stocks sectors. 

It may be difficult to find a single ETF that reflects this type of diversification. However, you can use multiple ETFs to support your own allocated and diversified portfolio. 

You could diversify your bond allocation with multiple ETFs that specialize in certain maturity lengths and bond types like corporate, high-yield corporates, treasuries and munis. 

You may also invest in ETFs that specialize in commodities, currencies, real estate, and so forth. As you can see, there are ETFs for many different asset classes and subclasses. 

However, it's important to realize that not all ETFs are good investments. Remember, ETFs that focus on a subclass can help diversify a portfolio, but alone, aren't considered diversified. 

For instance, an ETF made up of health care stocks may be diversified by company and industry group. But if a major health care bill is passed, chances are, all health care companies in that ETF will be affected. 

Some ETFs also have very little liquidity, which means it can be difficult to buy or sell them at the desired price. Of course, ETFs are just one way to allocate and diversify your portfolio. 

No matter how you choose to create your portfolio, be sure you're properly allocated and diversified in a manner that meets your goals and risk tolerance. 

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