Putting Together an Exchange-Traded Fund Portfolio

Part of Exchange-Traded Funds For Dummies Cheat Sheet (Australia/New Zealand Edition)

Investing a small amount in an exchange-traded fund (ETF) can give you exposure to a huge range of equities and other asset types, such as property, commodities and bonds. Investing in four or five ETFs allows you to diversify your investments across a range of assets, sectors and international markets.

Using ETFs can enhance an existing portfolio in many ways. For example, if you have a small number of stocks in your portfolio, adding an ETF can help to diversify your holdings and potentially reduce risk without sacrificing returns. But it all depends on your attitude towards risk — specifically, how much risk you’re prepared to take on for the return you’d like.

Your attitude to risk affects your risk profile — whether your investment style is aggressive (high risk for potentially high returns), middle of the road or more conservative (low risk for lower returns). Working out your risk profile can be tricky — your profile changes over time and as your circumstances change. Everyone is different and, if unsure, you should speak to a finance professional to work out just how much risk you can handle — the results may surprise you!

A guide to a spread of ETFs for different risk types is shown in the following table.

ETF Type Aggressive Middle-of-the-road Conservative
An ASX 200 ETF/NZX10 ETF 20 to 30% 20 to 30% 15 to 20%
An ASX small ordinaries ETF 10 to 15% 5 to 10% 0 to 5%
A European or global ETF 15 to 25% 10 to 20% 5 to 10%
A US ETF 10% to 15% 5 to 10% 0 to 5%
An Emerging Markets ETF 5 to 10% 0 to 5% 0%
A fixed interest managed fund 0 to 5% 15 to 25% 40 to 60 %

Building a diversified portfolio of ETFs can reduce risk but not remove it. A portfolio of ETFs may even add risk depending on what returns you want to achieve. The preceding table is only an example and does not take into account your personal circumstances. Speak to a professional adviser, work out your risk profile and figure out what ETFs suit your style.