Top 5 ETF Strategies for Building a Diverse Portfolio
Every investor wants to diversify and grow their investment assets. It is an investment management strategy that blends various assets in one portfolio with the hope that it will yield a higher return and also lower the investment risks.
Investing in an ETF (Exchange Traded Fund) is a simple way to diversify your portfolio and access investment markets. ETFs represent a pre-defined basket of stocks or commodities that you can bundle into a fund and list on the exchange for everyone to use.
Like stock trading, ETF investing is based on a long-term strategy for income generation. That’s why building a diverse and appropriate portfolio of ETFs requires a working strategy.
This blog post explores the top five strategies you can rely on to build a diverse portfolio of ETFs.
1. Core-Satellite Strategy
A core-satellite strategy is a method of diversifying a portfolio often utilized to achieve a balance between stability and growth. It splits your ETF portfolio into two parts, referred to as the “core” and the “satellite.”
The core portion is invested in broad-market ETFs, like those tracking the S&P 500 or total market indices. These funds are meant to deliver steady, long-term growth and represent the performance of the overall market.
On the other hand, the satellite portion consists of more specialized or higher-risk ETFs, such as those that concentrate on specific sectors and emerging markets or focus on areas of potentially higher returns.
This approach allows you some diversification while giving you enough room to take chances with smaller allocations. The idea is to invest most—about 70%—of your money in core ETFs and put about 30% in satellite ETFs.
2. Sector Rotation Strategy
A sector rotation strategy means shifting your investment portfolio from one sector of the economy to another as economic and market forces change. Since different sectors of the economy perform well at different times, this strategy enables investors to take advantage.
For example, during economic expansions or bull markets, technology and consumer discretionary sectors tend to do better than others. However, in a period of economic decline or bear market, utilities and healthcare often hold up better.
With this strategy, you don’t have to buy individual stocks to invest in specific sectors. You can easily adjust your sector positions as market conditions change.
Sector rotation adds an active management layer to your portfolio. This means that you adjust your investment holdings based on what you think is going to happen in the market.
3. Global Diversification Strategy
Global diversification is a strategic way of spreading investments across countries and regions to decrease risks while taking advantage of growth opportunities worldwide. Being dependent entirely on one country’s market exposes your portfolio to certain risks.
For example, risks such as economic downturns or geopolitical crises could easily hurt your portfolio and derail your investment plans. The ETFs’ global diversification strategy allows you to tap into an international market and spread some perceived market risks.
With this strategy, building a diverse portfolio of ETFs in developed economies like the US or Europe is possible through Developed Market ETFs. Conversely, emerging market economies that grow faster, such as India or Brazil, are targeted by the Emerging Market ETF.
You can combine these in one portfolio, thereby spreading your risk across various regions instead of depending on one particular market. As a result, poor performance in one region will often be offset by gains in another. This strategy also positions your portfolio to benefit from global growth trends, such as technological advancements or industrial expansion.
4. Dividend-Focused Strategy
A dividend-focused strategy for building a diverse ETF portfolio is perfect for investors looking to generate consistent income along with long-term growth. Dividend ETFs invest in companies that pay regular dividends. These companies are usually financially stable and well-established.
For instance, ETFs such as the Vanguard Dividend Appreciation ETF (VIG) or the iShares Select Dividend ETF (DVY) grant exposure to high-quality stocks that pay dividends. Such ETFs provide regular income you can reinvest, compound, or use as a cash flow.
This involves less risk than investing in stocks expected to grow quickly, as there’s no expected dividend return to shareholders. Moreover, by focusing on dividend-paying stock funds instead of individual equities or growth stocks, you gain both income generation and portfolio stability.
5. Bond and Fixed-Income Strategy
When you introduce bonds into your ETFs portfolio, you add stability and reduce the overall risk profile. Bonds are traditionally more resistant to sudden changes in price than stocks. This makes them a perfect shock absorber in times of falling markets.
A Bond and fixed-income strategy involves dedicating a certain part of the portfolio to bond ETFs, which are invested in government or corporations. You can also tailor your approach and risk tolerance by opting to include ETFs with short-term, intermediate-term, or long-term bonds.
This especially works during periods of economic uncertainty when stocks are not performing well. By adding bond ETFs to the mix, you end up with a better-balanced portfolio that generates steady income and reduces overall volatility.
Final Thoughts
ETFs are multi-purpose investment tools for various strategies. You get everything you want as an investor — stability, growth or income generation. To make the most of ETFs and create a portfolio that suits your needs best, consider the above-shared strategies and modify them to suit your goals and risk tolerance.
You can also combine different ETF strategies appropriately to benefit from market volatility and growth opportunities and construct a balanced portfolio with numerous benefits that last long.