How to Build an ETF Portfolio

By following these 3 simple rules, you can save a lot of time and money.

| More on:
The Motley Fool

Here at The Motley Fool, we do our best to help you find the right stock picks for your portfolio. But investing in individual companies has its downsides. For example, building a diversified stock portfolio involves making numerous trades, resulting in trading fees that really eat into your savings. It can also be a big task to choose which names to hold.

Building an ETF portfolio can help solve those problems. But what’s the best approach to take when investing in ETFs? Below are three rules you should always follow:

1. Limit the number of holdings

We’ve all heard how important it is to have a diversified portfolio; holding lots of different stocks and funds is supposed to reduce risk. But ETFs already have lots of holdings within them, so you really don’t need to hold ETFs at all. If you want a portfolio of Canadian equities, U.S. equities, international equities, and bonds, then four ETFs should be enough. This will save you a few dollars on trading fees, and make managing your portfolio far easier.

2. Limit exposure to Canada

In Canada, we certainly have a lot to be proud of. But our stock market index, which is heavily weighted in just three sectors, is not one of them. Financials, energy, and materials combine for over 70% of the iShares S&P/TSX Capped Composite Index ETF (TSX: XIC). This does not provide you with a lot of diversification, and worst of all, these industries all tend to be very cyclical.

So your best bet is to get plenty of exposure to international equities. But when you do, make sure to follow step number 3.

3. Limit exposure to foreign currencies

If you’re holding lots of investments outside of Canada, you get a boost when the Canadian dollar goes down in value. But problems can occur if you have too many holdings in foreign currencies, and the CAD goes up; this can really eat into your returns.

Fortunately Canada’s top ETF providers offer ETFs that are hedged back to the Canadian dollar. So you can hold international stocks without sweating the forex rates.

So what should you hold?

Both iShares and BMO offer very similar ETF products, with similar fees. The iShares XIC product mentioned above is perfect for investing in Canadian equities, as is the BMO S&P/TSX Capped Composite Index ETF (TSX: ZCN).

For U.S. Equities, it’s either the iShares S&P 500 Index ETF (CAD-Hedged) (TSX: XSP) or BMO S&P 500 Hedged to CAD Index ETF (TSX: ZUE). For international equities, either the iShares MSCI EAFE Index ETF (CAD-Hedged) (TSX: XIN) or BMO MSCI EAFE Hedged to CAD Index ETF (TSX: ZDM) would do.

For the safer part of your portfolio, most simple bond ETFs are good enough. There are also plenty of other choices like GICs, savings accounts, and insurance products. With rates so low nowadays, there isn’t a lot of difference between the different options.

Too often individual investors go with investment strategies that are either too complicated or too expensive. Or both. But by keeping it simple, and following the rules above, you can get a market rate of return without paying through the roof. As an added bonus, it’s a very low-maintenance approach.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

Growth from coins
Tech Stocks

2 Canadian Growth Stocks to Buy and 1 to Sell

The recent volatility in the stock market has created all kinds of opportunities for long-term investors.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Wednesday, February 21

The Federal Open Market Committee’s meeting minutes and more corporate results are likely to keep TSX stocks volatile today.

Read more »

Retirement
Investing

Got $5,000? Buy and Hold These 3 Value Stocks for Years

Given their solid underlying businesses, healthy growth prospects, and attractive valuation, I am bullish on these three value stocks.

Read more »

money cash dividends
Stocks for Beginners

Got $1,000 to Invest in Stocks? Put It in This Index Fund

This low-cost beginner-friendly ETF is a great way to invest $1,000.

Read more »

Overhead shot of young adults using technology at a table
Tech Stocks

3 Cheap Tech Stocks to Buy Right Now

Given their long-term growth prospects and discounted stock prices, I am bullish on these tech stocks.

Read more »

Gas pipelines
Dividend Stocks

TFSA Passive Income: Is Enbridge Stock a Buy, Sell, or Hold?

Enbridge now offers a yield near 8%. Is the dividend safe?

Read more »

money cash dividends
Dividend Stocks

Have $500? 2 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

Want some absurdly cheap stocks for your portfolio? Here are two options trading at a huge discount right now.

Read more »

Redwood trees stretch up to the sunlight.
Tech Stocks

These 3 Magnificent Stocks Keep Driving Higher

Constellation Software, Dollarama and another TSX stock have consistently generated positive investment returns. Here’s why they belong in your retirement…

Read more »