How to build an ETF portfolio

If you've decided exchange-traded funds (ETFs) are right for you, the next step is understanding how to use them in a portfolio.

Building an ETF portfolio might sound complicated, but it may be easier than you think. By following a few simple steps, you can create a portfolio designed to support your long-term goals. 

If you need a refresher on what ETFs are and how they work, check out the first article of this series. Otherwise, let's explore the key steps involved in building an ETF portfolio.

Start with your investment goal

Before choosing an ETF, it's worth taking a step back and thinking about what you're investing for.

Your goals can help you decide how much investment risk to take.

If you’re investing for retirement in 30 years, taking risk is important because it gives your money more chance to grow and beat inflation¹. You also have plenty of time to recover from stock market falls.

If your goal is only a few years away, taking less risk will help reduce the impact of a market downturn before you need to access your money.

Learn more about how to work out your attitude to risk.

Choose the right mix of investments

The next step is deciding how to divide your money between different types of investments, known as asset classes.

This is called asset allocation and it's one of the most important decisions an investor can make. The two main asset classes in most portfolios are shares and bonds².

Shares offer the potential for higher long-term growth, but their value can rise and fall more sharply over shorter periods. Bonds are typically more stable but offer lower potential returns.

The right mix of shares and bonds will depend on your goals and attitude to risk. There is no single allocation that's right for everyone.

Use ETFs as building blocks

Once you've decided on your asset allocation, ETFs can help you put your plan into practice.

Many investors start with a broad, diversified foundation. For example, this might include:

• an equity ETF that invests in global shares, providing exposure to companies from around the world

• a bond ETF that invests in a wide range of government and corporate bonds

Because each ETF can hold hundreds or even thousands of underlying investments, a small number of ETFs can provide exposure to many different markets and industries.

This diversification is important because no one knows which company, industry or region will perform best in the future. Spreading your investments across different areas helps soften the impact if one area underperforms and allows you to benefit when others are doing well.

Some investors complement these broad holdings with more focused investments. For example, they might add an ETF that invests in a particular region, such as emerging markets, if they believe it's likely to outperform other regions.

Keep your portfolio aligned with your goals

Building your portfolio is only the beginning. As your investments grow and markets move, it's worth checking your portfolio from time to time to ensure it still reflects your goals and attitude to risk.

For example, if shares perform particularly well, they could make up a larger proportion of your portfolio than you originally intended. Rebalancing – bringing your portfolio back to your target mix of shares and bonds – can help maintain the balance you originally set out to achieve. In this instance it would mean selling some of the shares to buy more bonds.

It's also important to remember that markets naturally rise and fall over time. While periods of volatility can be uncomfortable, having a clear plan can help you stay focused on your long-term goals rather than reacting to short-term market movements.

Explore Vanguard ETFs

Vanguard offers a wide range of equity ETFs and bond ETFs.

Some offer broad exposure to global markets, while others focus on specific countries and regions such as the UK, North America, Europe and emerging markets.

We also offer solutions for investors who prefer not to build their own portfolio. 

For example, our LifeStrategy and Target Retirement offerings – which invest mainly in funds rather than ETFs – combine shares and bonds in a single ready-made portfolio, with options ranging from 100% shares and 0% bonds to 20% shares and 80% bonds. 

If you’re not confident choosing investments yourself, we also offer a managed service where we select funds for you based on how you feel about risk and then manage your portfolio going forward. The funds in our managed portfolios are mutual funds and not ETFs.

ETFs can make it easier to build a diversified investment portfolio. But the principles of successful investing remain the same: start with clear goals, choose an appropriate mix of investments, keep costs low and stay focused on the long term.
 

¹ Inflation is the rise in prices for goods and services over time, meaning your money buys less than it used to.

² Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.
 

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Vanguard Target Retirement Funds and Vanguard LifeStrategy® Funds may invest in Exchange Traded Fund (ETF) shares. ETF shares can be bought or sold only through a broker. Investing in ETFs entails stockbroker commission and a bid- offer spread which should be considered fully before investing.

For further information on risks please see the “Risk Factors” section of the prospectus on our website.

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