How much of my portfolio should be in ETFs?
"A newer investor with a modest portfolio may like the ease at which to acquire ETFs (trades like an equity) and the low-cost aspect of the investment. ETFs can provide an easy way to be diversified and as such, the investor may want to have 75% or more of the portfolio in ETFs."
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation.
iShares Core Moderate Allocation ETF (AOM)
This ETF aims to track the investment results of an index made up of stock and bond funds that is intended to represent a moderate target risk allocation strategy. The fund holds roughly 40 percent in stocks and 60 percent in bonds.
It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.
Level of Assets: An ETF should have a minimum level of assets, with a common threshold being at least $10 million. An ETF with assets below this threshold is likely to have a limited degree of investor interest, which translates into poor liquidity and wide spreads.
SPY, VOO and IVV are among the most popular S&P 500 ETFs. These three S&P 500 ETFs are quite similar, but may sometimes diverge in terms of costs or daily returns. Investors generally only need one S&P 500 ETF.
A balanced ETF—also known as an asset allocation ETF—is a fund of funds that owns two or more different types of assets. Most commonly they hold a selection of stock and bond funds, with fixed allocations to each asset class.
This investment strategy seeks total return through exposure to a diversified portfolio of primarily equity, and to a lesser extent, fixed income asset classes with a target allocation of 70% equities and 30% fixed income. Target allocations can vary +/-5%.
How long should you hold an ETF?
Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.
ETFs can be safe investments if used correctly, offering diversification and flexibility. Indexed ETFs, tracking specific indexes like the S&P 500, are generally safe and tend to gain value over time. Leveraged ETFs can be used to amplify returns, but they can be riskier due to increased volatility.
Investing in an ETF that tracks a financial services index gives you ownership in a basket of financial stocks versus a single financial company. As the old cliché goes, you do not want to put all your eggs into one basket. An ETF can guard against volatility (up to a point) if some stocks within the ETF fall.
ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.
A high P/E ratio indicates that the ETF is overvalued. Investors should keep in mind that some ETFs, such as growth ETFs, are expected to have higher P/E ratios compared to a broad market index, such as the S&P 500.
Under the Investment Company Act, private investment funds (e.g. hedge funds) are generally prohibited from acquiring more than 3% of an ETF's shares (the 3% Limit).
Market risk
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
One simple rule of thumb I tend to adopt is going by the 4-3-2-1 ratios to budgeting. This ratio allocates 40% of your income towards expenses, 30% towards housing, 20% towards savings and investments and 10% towards insurance.
Specifically, a fund is prohibited from: acquiring more than 3% of a registered investment company's shares (the “3% Limit”); investing more than 5% of its assets in a single registered investment company (the “5% Limit”); or. investing more than 10% of its assets in registered investment companies (the “10% Limit”).
All products need to be large enough that they are able to build a diversified portfolio that will track its index closely. For equity ETFs tracking well known indices such as the FTSE 100, the minimum is in the low millions.
How much should I diversify my portfolio?
“Most research suggests the right number of stocks to hold in a diversified portfolio is 25 to 30 companies,” adds Jonathan Thomas, private wealth advisor at LVW Advisors. “Owning significantly fewer is considered speculation and any more is over-diversification.
Diversification: A well-diversified portfolio should include ETFs that cover different asset classes (stocks, bonds, commodities, etc.), sectors, industries, and geographical regions. This spreads risk and reduces the impact of any single investment on the overall performance.
According to our calculations, a $1000 investment made in February 2014 would be worth $5,971.20, or a gain of 497.12%, as of February 5, 2024, and this return excludes dividends but includes price increases. Compare this to the S&P 500's rally of 178.17% and gold's return of 55.50% over the same time frame.
In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500, then you would be sitting on a cool $1.2 million today.
Think About This: $10,000 invested in the S&P 500 at the beginning of 2000 would have grown to $32,527 over 20 years — an average return of 6.07% per year.
References
- https://www.foxbusiness.com/personal-finance/etfs-your-portfolio-experts-weigh-in-what-percentage-to-own
- https://www.investopedia.com/news/etf-open-secret-theyre-tax-loophole/
- https://www.investopedia.com/articles/basics/11/due-dilligence-on-dividends.asp
- https://www.nerdwallet.com/article/investing/sp-500-etfs
- https://www.suredividend.com/safest-dividend-stocks/
- https://www.investopedia.com/articles/investing/020916/etfs-can-be-safe-investments-if-used-correctly.asp
- https://finance.yahoo.com/news/invested-1000-p-global-decade-133005715.html
- https://mydividendsnowball.com/how-i-made-1000-a-month-in-dividend-income/
- https://www.bogleheads.org/wiki/Three-fund_portfolio
- https://www.thestreet.com/etffocus/trade-ideas/the-only-leveraged-etf-that-i-would-buy-hold-long-term
- https://www.forbes.com/advisor/investing/best-balanced-etfs/
- https://www.fool.com/investing/2024/04/03/1-high-yield-dividend-etf-to-buy-now-for-passive-i/
- https://www.fool.com/investing/2024/03/24/you-can-do-better-than-sp-500-buy-this-etf/
- https://etfdb.com/compare/highest-5-year-returns/
- https://money.usnews.com/investing/articles/best-dividend-stocks-to-buy-this-year
- https://moneywise.com/investing/voo-vs-vti
- https://www.ig.com/au/trading-strategies/what-is-the-best-time-to-buy-and-sell-shares--211026
- https://www.kiplinger.com/article/investing/t047-c007-s001-two-vanguard-index-funds-you-need-for-retirement.html
- https://www.irs.gov/taxtopics/tc404
- https://www.investopedia.com/articles/stocks/09/buying-stock-or-etf.asp
- https://stockanalysis.com/etf/qqq/dividend/
- https://www.fidelity.com/learning-center/investment-products/etf/risks-with-etfs
- https://www.investopedia.com/articles/exchangetradedfunds/08/etf-choose-best.asp
- https://www.sofi.com/learn/content/how-many-stocks-should-i-own/
- https://www.nerdwallet.com/article/investing/high-dividend-etfs
- https://groww.in/blog/how-many-mutual-funds-invest
- https://www.justetf.com/uk/market-overview/top-50-etfs-with-the-highest-dividend-yield-in-gbp.html
- https://talkmarkets.com/content/how-much-money-do-i-need-to-invest-to-make-3000-a-month?post=431352
- https://www.investopedia.com/terms/d/dividend-etf.asp
- https://www.canadianmoneysaver.ca/articles/3495
- https://passiv.com/blog/etf-overlap/
- https://www.simplysafedividends.com/world-of-dividends/posts/2-how-to-build-a-dividend-portfolio
- https://www.etf.com/topics/aggressive
- https://www.fidelity.com/learning-center/investment-products/etf/dividends-on-etfs
- https://www.suredividend.com/pros-cons-dividend-investing/
- https://www.usatoday.com/money/blueprint/investing/warren-buffett-berkshire-hathaway-portfolio/
- https://www.titan.com/articles/etf-drawbacks
- https://curvo.eu/article/build-portfolio-etf
- https://finance.yahoo.com/news/best-balanced-etfs-mutual-funds-153351096.html
- https://www.investopedia.com/articles/mutualfund/07/etf_downside.asp
- https://www.schwab.com/learn/story/etf-vs-mutual-fund-it-depends-on-your-strategy
- https://www.investopedia.com/articles/markets/071616/history-sp-500-dividend-yield.asp
- https://www.investopedia.com/investing/monthly-dividend-etfs/
- https://www.barclays.co.uk/smart-investor/new-to-investing/reducing-unnecessary-risk/how-many-funds-should-you-hold-in-your-portfolio/
- https://www.nasdaq.com/articles/this-high-yield-vanguard-etf-could-turn-$400-per-month-into-$18900-in-annual-dividend
- https://www.dividendmax.com/united-states/nyse-arca/financial-services/vanguard-sandp-500-etf/dividends
- https://www.fidelity.co.uk/markets-insights/investing-ideas/funds/how-many-funds-should-i-hold/
- https://www.trackinsight.com/en/education/how-many-etfs-should-you-own
- https://www.morningstar.com/stocks/10-best-dividend-stocks
- https://money.usnews.com/investing/articles/best-etfs-to-buy
- https://investor.vanguard.com/investor-resources-education/taxes/how-mutual-funds-etfs-are-taxed
- https://www.etf.com/sections/etf-basics/dividend-etfs-vig-vs-schd-comparison-guide
- https://www.forbes.com/advisor/investing/dividend-yield/
- https://www.investopedia.com/financial-edge/0812/how-to-live-off-your-dividends.aspx
- https://www.investmentfundlawblog.com/resources/investments-by-funds/investments-investment-companies/
- https://www.nasdaq.com/articles/heres-how-you-can-collect-%2450000-in-dividends-per-year-in-retirement
- https://www.fool.com/investing/general/2013/09/21/the-best-performing-stock-on-the-sp-500-since-1980.aspx
- https://www.thestreet.com/etffocus/dividend-ideas/10-stock-etfs-that-pay-monthly-dividends
- https://finance.yahoo.com/news/living-off-interest-1-million-164122384.html
- https://time.com/personal-finance/article/how-many-stocks-should-i-own/
- https://www.pillsburylaw.com/images/content/3/2/v2/3201/C-S-Advisory-07-22-2010-II.pdf
- https://www.stoddardfinancial.net/dividend-versus-growth-investments/
- https://www.investopedia.com/articles/exchangetradedfunds/11/building-an-etf-portfolio.asp
- https://www.blackrock.com/us/individual/literature/fact-sheet/sma-target-allocation-70-30-etf-factsheet.pdf
- https://www.franklintempleton.com/planning-and-learning/learn-about-investing/investing-principles/cost-of-timing-the-market
- https://www.investopedia.com/dividend-etf-vs-s-and-p-500-7968097
- https://advisors.vanguard.com/assets/corp/fund_communications/pdf_publish/us-products/investment-profiles/0923.pdf
- https://www.etf.com/sections/etf-basics/dividend-etfs-vs-stocks-comparison-guide
- https://finance.yahoo.com/news/schd-vs-sphd-dividend-etf-185901695.html
- https://www.investopedia.com/articles/exchangetradedfunds/09/etf-out-of-business.asp
- https://www.fidelity.com/learning-center/investment-products/etf/which-is-right-for-you
- https://www.consumerreports.org/cro/2014/07/are-your-investments-too-diversified/index.htm
- https://www.linkedin.com/pulse/4-3-2-1-approach-financial-freedom-royston-tan-%E9%99%88%E9%9F%A6%E9%BE%99-chfc-asep-ibfa-
- https://www.etfstream.com/articles/does-size-matter-when-selecting-etfs
- https://finance.yahoo.com/news/invest-100-000-turn-1-124500592.html
- https://etfdb.com/compare/dividend-yield/
- https://www.schwab.com/etfs/types/dividend-etfs
- https://www.investopedia.com/articles/investing/120415/how-dividendpaying-etfs-work.asp
- https://lakshmishree.com/blog/15-best-etfs-in-india-to-invest-in-2024/
- https://www.investopedia.com/articles/exchangetradedfunds/11/advantages-disadvantages-etfs.asp
- https://www.etf.com/sections/etf-basics/how-tell-if-etf-overvalued
- https://www.schwab.com/learn/story/beyond-4-rule-how-much-can-you-spend-retirement
- https://finance.yahoo.com/news/vanguard-p-500-etf-voo-112006029.html
- https://www.investopedia.com/financial-edge/0113/7-easy-to-understand-etfs-to-replace-a-savings-account.aspx
- https://www.capitaltopics.com/blogue/is-100-stocks-really-the-best-option-for-your-portfolio
- https://www.bankrate.com/investing/best-dividend-etfs/
- https://www.thestreet.com/etffocus/dividend-ideas/benefits-of-dividend-etf-investing
- https://www.etfcentral.com/etf-u/guides/how-many-etfs-should-i-own
- https://www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp
- https://seekingalpha.com/article/4664657-schd-why-pick-stocks-when-you-can-buy-this-etf
- https://www.cnbc.com/2024/02/23/how-dividend-investing-can-make-you-money-while-you-sleep.html
- https://www.schwab.com/learn/story/3-ways-to-build-all-etf-portfolio
- https://www.reddit.com/r/TheMoneyGuy/comments/19fmhzg/new_paper_suggests_a_portfolio_of_100_stocks_is/
- https://www.canstar.com.au/investor-hub/buy-sell-hold-etfs/
- https://money.usnews.com/investing/articles/dividend-stocks-to-buy-and-hold-forever
- https://www.etf.com/sections/etf-basics/dividend-etf-vs-stocks
- https://www.financialtechwiz.com/post/voo-vs-vym/