Top ETF investment strategies for diversified portfolios

If you wish to build a diversified ETF portfolio to grow your returns consistently over time, where must you invest? Read on to know the steps that you must follow to build such a portfolio and the recommended strategies that can help you build an effective portfolio.

How to implement portfolio diversification via ETF investments?

The key to diversifying your ETF portfolio is efficient asset allocation. Through your ETF investments, if you manage to invest in a variety of ETFs across various sectors that can help you mitigate overall portfolio risk, you will have built a diversified portfolio. You must also consider the time horizon of an ETF before choosing to invest in it. If you are a long-term investor, you can invest in growth-oriented ETFs like small-cap equity ETFs or tech-focused ETFs. However, if you wish to invest for the short term, you can invest in fixed income securities.

Steps for building an ETF portfolio:

If you wish to build an ETF portfolio, here are the key steps that you must follow –

1. Determine the right asset allocation: As a first step, you must define your investment goals. Determine why you wish to invest in an ETF and note down that goal. Clearly defining your investment goals will help you pick the right ETF investment amount, duration, and select the ideal asset allocation. To fix the right asset allocation, you must consider a variety of factors such as your risk appetite, your returns-related expectations, and your time horizon. Try investing in equity and fixed-income securities to practise effective asset allocation.
2. Research and compare ETFs online: Next, you must go through various ETF options online and compare them to select the best one. While ETFs generally charge lower expense ratios, you must still compare the expense ratios charged by various ETFs and their past performances before investing in them.
3. Implement your ETF investment strategy: In the third step, after finalising on one ETF, you must implement your ETF strategy. One of the key advantages of ETFs is that they can be traded on stock exchanges like stocks. You must generally refrain from placing all your buy orders on the same day. Several investors place stop-loss orders while buying ETFs to minimise potential losses.
4. Keep reassessing your ETF investments: As the final step, you must regularly reassess your ETF investments. This is to check if your ETF investment still aligns well with your investment objectives. Additionally, since investment goals change in nature over time, your ETF investments must adapt to this change. This is another reason why you must keep reassessing your ETF investments.

Strategies to build an effective ETF investment portfolio:

Here are the key strategies you can follow to build an effective ETF investment portfolio:

• Choose sector ETFs that focus on specific industry sectors: You can invest in sector-specific ETFs to benefit from the growth of individual sectors. Try choosing sector ETFs that are largely uncorrelated. For instance, if you have chosen an infrastructure-based ETF, try choosing a pharmaceuticals-based or tech-based ETF next. Sector ETFs help you gain exposure from various industries, thereby helping you diversify. Furthermore, you can test your hypotheses about the growth of various market sectors by investing in these ETFs.
• If you wish to focus on emerging international markets, consider investing in international ETFs: International ETFs offer another means of portfolio diversification. International ETFs may track an index that invests in a country or a specific region around the world. You must analyse the fundamentals and technical of all international ETFs before investing in them.
• Invest in commodity ETFs like Gold: Gold ETFs have a particular popularity in India. Gold ETFs can also be used as hedge protection against a volatile market. Commodity ETFs like Gold ETFs, therefore, help you mitigate overall risk during a volatile market situation.

You must check the past performance of an ETF fund, its expense ratio, and research about the sector (if it’s a sector ETF) before investing in the ETF fund.