How To Construct Your ETF Portfolio

In today’s Juice, we pick up where we left off last week when we started putting together a sample portfolio of ETFs. We like ETFs for several reasons. 

One, relative to stock picking, ETFs take some of the guesswork out of investing. You might love dozens of stocks or want hefty exposure to the biggest names in the Nasdaq. If you’re of modest means, it’s difficult to do this by purchasing individual stocks. 

Two, and closely related to point one, ETFs will most likely get you closer to diversification than stock picking. 

Three, you have more ETFs to choose from than ever before. We’re in the golden age of investing, thanks first to commission-free trading, access to private equity investments, and now the broad slate of ETFs available to everyday investors. 

This third point can be a blessing or a curse. With so many ETFs in general – and the rise of actively-managed and thematic ETFs – you run the risk of making what should be a relatively simple process too complicated. 

Therefore, today we focus on point three with some help from our sister newsletter, The Spill. 

In our next ETF portfolio installment, we consider fees. Along the way we will make additional suggestions as a starting point for this hypothetical and maybe your real portfolio. 

But first, here are the ETFs we currently have in the portfolio alongside why. 

• SPDR S&P 500 ETF (SPY) and Invesco QQQ Trust (QQQ): Because together these two ETFs do a fantastic – and probably the best – job of getting you exposure to the broad market, starting with overweight positions in the market’s hottest names. We’re talking Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Amazon.com (AMZN) and Tesla (TSLA).
• Schwab US Dividend Equity ETF (SCHD) and ProShares S&P 500 Dividend Aristocrats ETF (NOBL): Because we love dividend stocks and these two ETFs double your exposure to some of the top blue chip, dividend stocks while covering a wide swath of the market’s best dividend stocks, particularly for long-term investors. 
• Vanguard Real Estate ETF (VNQ) and SPDR S&P Homebuilders ETF (XHB): Because you might want to use ETFs to get access to a specific sector. We chose real estate because it’s broad and a tough area to stock pick in. We chose these two ETFs because they cover a solid and diverse chunk of the space, providing exposure to a wide array of REITs, homebuilders and names you might not consider real estate stocks, particularly Home Depot (HD) and Lowe’s (LOW).

As we constructed this part of the portfolio, we promised we would look at active ETFs. We have a lot more to say about active ETFs going forward, but today we look to a recent installment of our sister newsletter, The Spill, for some fantastic insight.  

In The Best ETF to Invest in AI, The Spill gets to the heart of the conundrum we brought up in relation to point three. 

While it’s great to have access to specialized actively-managed ETFs where fund managers stock pick around a theme or outside of and around a passive index, you can quickly go down a counterproductive rabbit hole if you try to get too cute. 

Consider AI. 

If you think it’s the future, it’s sensible to buy an ETF that focuses on the space. Here again, you’ll have more diverse exposure to the space with a solid ETF than you would via stock picking. Plus, it’s a new space you might not know as much about. So there’s nothing wrong with putting the power in somebody else’s hands.

The question is do you put the power in the hands of a passively-managed fund that tracks a market index or do you go with a financial pro who stock picks around the theme of AI? 

The Spill provided a concise answer to this question as it assessed five AI ETFs. Our friends at The Spill ultimately went with the passive-managed, index-tracking VanEck Vectors Semiconductor ETF (SMH), giving it a 10 out of 10 rating, because: 

While there are some ‘AI’ ETFs out there, they don’t do a particularly good job of investing in the space.

In fact, our data picked up a different tact by financial pros.

Instead of looking at esoteric technology ETFs, they’re focused on semiconductor ETFs, particularly the VanEck ETF (SMH).

It’s a simple story, really…

AI = Processing Power = Semiconductors

So, if you’re looking for an investment strategy straight from the financial pros playbook, here’s why you should consider the SMH.

After comparing SMH to four other ETFs, The Spill chose SMH because it’s the most straightforward of the bunch and does the best job of getting at the heart of AI:

This list of ETFs is a perfect example of why simpler is better. The last two ETFs, where fund managers try to gain an edge through some methodology tweak, are the worst performers.

To read The Spill’s full analysis of SMH and see the ETFs it used for comparison, go here. 

The Bottom Line: So we’re not shaking our heads when we add SMH to our ETF portfolio. It provides a direct gateway to a hot sector of the market that’s certainly more than a fad. As The Spill put it, “We expect AI investments are at the beginning stages of a supercycle.” 

The Juice agrees. 

As we expand our ETF portfolio we’ll discuss fees. So keep an eye on your inbox and tell a friend about our little newsletter. We appreciate it.

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