Start Here To Build A Killer ETF Portfolio

As we continue diving deep in ETFs, today The Juice presents a solid starter portfolio of exchange-traded funds. In the coming weeks and months, we’ll add to it taking things into more advanced territory. 

At the top of this email we didn’t include what are always the two top-searched ETFs in Trackstar, our proprietary sentiment indicator. Because it goes without saying that if you’re a long-term investor building a portfolio with ETFs as the backbone, you probably should start with the two most popular passive, index-tracking funds – the SPDR S&P 500 ETF (SPY) and Invesco QQQ Trust (QQQ).  

As the name implies SPY mimics the returns of the S&P 500 Index, while QQQ tracks the Nasdaq-100 Index. By investing in these two funds, you’ll have broad exposure to many of the biggest and best companies in the world. And you’ll be overweight names such as Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Amazon.com (AMZN) and Tesla (TSLA), not to mention healthy allocations of less flashy stocks such as PepsiCo (PEP) and UnitedHealth Group (UNH). 

You’ll find other ETFs that do exactly what the more popular SPY and QQQ do. For example, #5 on the Trackstar list of ETFs that are not SPY or QQQ, the Vanguard S&P 500 ETF (VOO), also tracks the S&P 500 Index. It produces pretty much identical returns to SPY with a near-identical dividend yield and expense ratio. Ultimately, you really can’t go wrong with either, unless, of course, the market crashes, but that’s not the ETF’s fault. They’re passive investments meaning there’s no stock picking, just index-tracking. 

After you build this broad market base, you can start to specialize to your goals, preferences and risk profile. 

In future installments, we’ll broaden and deepen this discussion. For now, it’s tough to go wrong with a solid dividend ETF. The first two that come to mind: #2 on the Trackstar list of ETFs that are not SPY or QQQ, the Schwab US Dividend Equity ETF (SCHD) and ProShares S&P 500 Dividend Aristocrats ETF (NOBL).

Both ETFs only buy dividend-paying stocks. The difference: SCHD tracks the return of the Dow Jones U.S. Dividend 100 Index and NOBL attempts to mirror the results of the S&P 500 Dividend Aristocrats Index. 

The thing that makes NOBL different is that the index it tracks only consists of companies that have increased their dividend payment every year for at least the last 25 years. So it’s less broad than SCHD. 

In any event, combining the two ETFs gives you double exposure to names like PepsiCo, and Chevron (CVX). At the same time, NOBL owns REITs such as Realty Income (O) and Essex Property Trust (ESS) and blue chips like McDonald’s (MCD) and Walmart (WMT) that you won’t find in SCHD. And, for its part, SCHD exposes you to names you won’t find in NOBL, such as Verizon (VZ) and Cisco Systems (CSCO). 

If you stopped right here – with SPY, QQQ, SCHD and NOBL – you’d be doing more than alright. 

However, you can choose to specialize even more. 

ETFs give you the ability to basically pick a region of the world or a specific market sector and invest in a large basket of names in that area or space. 

For example, maybe you’re bullish on real estate, but you think it’s a scary area to stock pick in. Makes sense because real estate can mean a lot of things, from homebuilders to owners/operators to mortgage servicers and beyond. 

One of the best broad examples of a solid real estate ETF is the Vanguard Real Estate ETF (VNQ), which looks to track the performance of the MSCI US Investable Market Real Estate 25/50 Index. As of the end of May, VNQ owns 165 stocks that are all real estate investment trusts (REITs). With VNQ, you get a little bit of everything across the vast real estate sector, including: 

• More exposure to dividend aristocrats such as O and ESS. 
• Exposure to owners and operators of everything from commercial retail space (this is what O does), luxury apartments (this is what ESS does), other apartment owners/operators (e.g., Mid-America Apartment Communities (MAA)) public storage space (namely Public Storage (PSA) and outdoor billboard/advertising companies like Outfront Media (OUT). 

If homebuilders are more your thing, there’s the SPDR S&P Homebuilders ETF (XHB) with returns that correspond to the S&P Homebuilders Select Industry Index. This puts you – indirectly – into stocks such as PulteGroup (PHM), Toll Brothers (TOL), not to mention Lowe’s (LOW) and Home Depot (HD).  

You’re seeing the power of what ETFs can do. 

They can give you diversified exposure to the broad stock market, specific types of stocks and your desired sectors and subsectors. ETFs help take the guesswork out of investing because, if for no other reason, they eliminate the stress and uncertainty we can sometimes feel when we attempt to pick stocks. In the process you end up overweight many of the market’s most popular and attractive names. 

The Bottom Line: For most everyday investors, it would be difficult to do everything we said in that last paragraph via purchases of individual stocks. This is one reason why we love ETFs so much. 

As we continue building out an ETF portfolio we’ll go deeper into sector-specific ETFs as well as actively-managed ETFs, both of which can help you really get at areas of the market you’re long-term optimistic on. We’ll also cover other important aspects of ETF investing, such as fee structures.

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