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How to build a portfolio with ETFs

Key takeaways

  • Many investors choose to build their portfolios with ETFs to help provide diversification benefits.
  • The basic process of building an ETF portfolio is to identify an appropriate risk level for your situation, translate that risk level into a targeted investment mix, and choose specific ETFs to fill in the various buckets of that investment mix.
  • Building a portfolio isn't a one-and-done task. Rather, investors should plan to check in on their portfolios periodically and make occasional adjustments as needed.
  • Fidelity customers can use the ETF Portfolio Builder tool to help create a diversified ETF portfolio based on their risk tolerance.

ETFs can be incredibly valuable and useful tools in investors' toolbelts. Whether you're looking for low costs, a simple way to diversify, or an investing choice to help improve tax efficiency, ETFs have a range of attractive attributes that can help them fill a variety of roles in investors' portfolios. (Before you decide to invest in ETFs, make sure you understand the risks. Learn more about the basics of ETFs.)

These days there are so many ETFs to choose from—and their potential benefits are so widely understood—that many investors choose to build full portfolios out of ETFs.

Of course, building a well-rounded portfolio can feel like a tall order even to experienced investors. That's why we've sought to help simplify the process and break it into manageable steps, so you stay focused on your goal of getting invested.

Here are 5 steps to help you build an ETF portfolio.

Want to make it even simpler?

Fidelity customers can use the ETF Portfolio BuilderLog In Required  tool to help create a diversified ETF portfolio based on their risk tolerance—and even get invested—with only a few clicks.

1. Figure out how much risk to take on

Taking on risk sounds like a bad thing—but it's important to remember that in investing, risk and return potential are joined at the hip. A low-risk portfolio won't have the potential to return as much as a higher-risk portfolio over the long run.

Rather than gravitating to the extremes of no risk or excessive risk, many people find it makes sense to choose a risk level (and potential returns level) that's somewhere in the middle. Here are some of the main factors that typically inform this decision:

  • Time until you'll use this money (aka time horizon). All else equal, the longer this money will stay invested, the more risk you may be able to take on. That's why a 20-something investing for retirement and who is comfortable with the ups and downs associated with a riskier portfolio can typically invest in an aggressive, stock-heavy portfolio. But someone saving up to buy a house in a year probably should not take on much risk with their down-payment money.
  • How you feel about market swings (aka risk tolerance). An aggressive portfolio might return more over the long run but could go through more severe declines over shorter-term periods. Risk tolerance is a measure of how much stock market up-and-down you're willing to put up with in exchange for potential longer-term growth.
  • Overall strength of your finances (aka risk capacity). If you're on strong financial ground—i.e., you have solid emergency savings, you don't have too much debt or any high-interest debt, you have enough insurance coverage and a stable job—you may be able to take on more risk than you would if your foundation was shakier.

Learn more about how these 3 key factors work together to inform your investing strategy.

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2. Translate that risk level into an overall investment mix

Once you understand how much risk you can take on, you can start to zero in on a targeted investment mix. Your investment mix is also known as your asset allocation, and it means what percent of this portfolio you're holding in different major types of investments.

At a high level, people often think about this in terms of their overall mix between stocks and bonds. Stocks generally have higher-risk and higher-return potential than bonds. So a portfolio with 90% stocks and 10% bonds would be more aggressive than a portfolio with 50% stocks and 50% bonds. To get more granular with your portfolio, you might also consider the mix between US stocks and foreign stocks.

Here are some examples of potential investment mixes an investor might target at this stage—covering a wide range of risk levels.

3 pie charts show sample asset allocations. Conservative portfolio includes an 80% allocation to bonds, 14% to US stocks, and 6% to foreign stocks. Balanced portfolio includes a 50% allocation to bonds, 35% to US stocks and 15% to foreign stocks. Aggressive growth portfolio includes a 15% allocation to bonds, 60% to US stocks, and 25% to foreign stocks.
Model portfolios are hypothetical and for illustrative purposes only. The primary objectives of these portfolios is to provide a representation of just one way you might construct a well-diversified portfolio of ETFs on a particular risk tolerance level. Learn more about our target asset mixes and model portfolios and see our methodology (PDF).

Just remember there's no single "best" investment mix—just tradeoffs to weigh in relation to your situation and preferences. Planning tools may be able to help you work through this step.

3. Fill in the buckets of that investment mix with specific ETFs

Now that you have the outline of your portfolio sketched out, it's time to shade in the details with specific ETFs.

For each of those buckets within your asset mix, you'll generally want to be broadly diversified among many different investment types (learn more about why diversification is so important and how to diversify). For example, in the US stock portion of your portfolio you might diversify by owning stocks from companies in a wide variety of industries and owning some smaller companies in addition to large companies. Fortunately, many ETFs are themselves so diversified that it can be possible to achieve these goals with just one or a few ETFs for each of those buckets.

Fidelity's ETF offerings and ETF research resources can help you filter through the ETF universe. Chances are, there will be many ETFs that could meet your needs and fulfill each of these specific roles in your portfolio. To narrow your search further (and avoid getting stuck on this step), here are some factors you might consider as you're comparing specific ETFs:

  • Targeted investment universe. ETFs could fall into the same broad category, like international stocks or US bonds, but actually target very different parts of those investment universes. Checking each ETF's objective and benchmark (meaning what index it's measured against) can help you get clearer on this, to help you choose an appropriate ETF for each role in your portfolio.
  • Active vs. passive. An active ETF is generally run by one or more professional managers, who evaluate investments and decide what to hold in the ETF. A passive ETF (aka index ETF) tracks the performance of an index, generally by holding the same investments the index tracks. Some investors feel strongly that active is always better or passive is always better, but many find that there are pros and cons to each approach and may use a mix of both. (Learn more about index investing and about actively managed ETFs.)
  • Expense ratio. This is essentially the cost of being invested in a given ETF. Many investors choose ETFs for their relatively low cost structures. The main way to compare costs among ETFs is by looking at each ETF's expense ratio, which shows the annual cost of investing in the fund as a percent of assets managed. For example, for $1,000 invested in an ETF with an expense ratio of 0.25%, that would work out to $2.50 a year.
  • Issuer. The issuer (aka sponsor) means the company that offers and manages the ETF. Particularly for the core parts of their portfolio, some investors prefer to invest with an established ETF provider with a strong reputation and long investing track record.
  • Analyst ratings. Many ETFs receive ratings from firms that analyze ETFs. These ratings are not intended to predict how an ETF will perform, but rather to measure how well an ETF is managed in terms of its cost, efficiency, and other factors.

Of course, these are just some of the potential considerations. As you become more familiar with ETF investing you may grow comfortable with doing more deep-dive research.

4. Make the trades to buy your ETF portfolio

You've got your list of ETFs to invest in, and you know what percent of your portfolio you're going to invest in each. Now you just need to place some trades. For that you'll need to make sure you have each ETF's ticker symbol handy, and to make sure you've translated your targeted percentage allocations into dollar amounts.

If you're an experienced investor then this step might be a breeze. But if you're newer it can be nerve-wracking to hit that "Place Order" button. Investors with Fidelity can follow a step-by-step guide on How to trade stocks and ETFs to help walk you through the process from start to finish.

5. Monitor and adjust as needed

Once your trades are completed, you'll own an ETF portfolio. But it's important not to see this as the end of the process. You'll want to periodically check in on your ETF portfolio, consider whether it's still meeting your needs and goals, and potentially make adjustments.

Here are some of the issues you'll want to check in on from time to time:

  • Have you saved more toward this goal? As you sock more cash away for this purpose, you may need to place additional trades to get that extra cash invested and keep your targeted investment mix on track. (If you're regularly saving additional amounts every month, you may be able to automate this process.)
  • Do you need to rebalance? Over time, it's normal for a portfolio to start to drift away from its targeted investment mix. Periodically you may need to place a few trades to bring your portfolio back on track—such as trimming some top-performing positions if they've grown to be an outsized portion of your portfolio.
  • Do you still have the right targeted investment mix? Sometimes, your goal for a particular pot of money changes, which means you need to reevaluate the right risk level for that portfolio. Even if your goal hasn't changed, it may be drawing nearer. Many investors find it makes sense to reduce risk as they near an investing goal—such as by holding more in bonds and less in stocks as they near retirement.
  • Is each investment doing its job in the portfolio? Every ETF in your portfolio should be there for a reason. If you've bought an ETF because you want it to track the performance of US large-cap stocks, then you want it to perform in line with large-cap US stocks. If one of your investments isn't filling the role you expected it to, you may need to reevaluate.

For more on monitoring and maintaining your investments, learn about how to give your portfolio a checkup.

Ready to take the next step?

For a streamlined approach to building an ETF portfolio, Fidelity customers can try the ETF Portfolio BuilderLog In Required. For a more hands-on do-it-yourself approach, investors can use the ETF screenerLog In Required  to find ETFs that meet their criteria. Or, if you need a bit more support in making progress on your investing journey, you can learn about how we can work together.

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Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus, an offering circular, or, if available, a summary prospectus containing this information. Read it carefully.

ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses.

The ETF Portfolio builder is designed to help you create and research diversified portfolios that may be suited for your needs. Our model portfolios show one way to construct a portfolio aligned with a sample investment objective. Start by choosing your investment objective and whether you want a model of Fidelity only ETFs or one with a mix of Fidelity and iShares ETFs. Use these model portfolios as a starting point to help you research investments or help refine your existing portfolio. This information provided is intended to be educational and is not tailored to the investment needs of any specific investor or be the primary basis of your investment decision. Please see the model portfolio methodology (PDF) for more information about how the models are created. You should also carefully research any fund you may be considering prior to making an investment decision. You may consider another allocation and other investments, including non-Fidelity funds, having similar risk and return characteristics ETFs are subject to market volatility and the risks of their underlying securities which may include the risks associated with investing in smaller companies, foreign securities, commodities and fixed income investments. Foreign securities are subject to interest rate, currency- exchange rate, economic and political risk all of which are magnified in emerging markets. ETFs that target a small universe of securities, such as a specific region or market sector are generally subject to greater market volatility as well as the specific risks associated with that sector, region or other focus. ETFs which use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETF is usually different from that of the index it tracks because of fees, expenses and tracking error. An ETF may trade at a premium or discount to its Net Asset Value (NAV). The degree of liquidity can vary significantly from one ETF to another and losses may be magnified if no liquid market exists for the ETF’s shares when attempting to sell them. Each ETF has a unique risk profile which is detailed in its prospectus, offering circular or similar material, which should be considered carefully when making investment decisions.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Past performance is no guarantee of future results.

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