It’s never been easier to build a simple portfolio, thanks to ETFs.
New ETF investors often wonder how many ETFs to invest in…
If you pick the right ETF, you can get away with investing in a single ETF.
There are things you’ll want to be careful of when investing in a single ETF, such as lack of diversification and potential underperformance.
There are tons of ETFs to choose from, and if you put “all of your eggs” in the wrong ETF, you could end up underperforming the overall stock market.
This article will discuss everything you must know about creating a one ETF portfolio to maximize your investment returns.
What is an ETF?
An ETF, or exchange-traded fund, is a type of investment vehicle that allows you to invest in multiple stocks and industries all within one fund. You can think of an ETF as a stock that holds a basket of different stocks. ETFs are traded on the stock market, just like stocks.
Unlike traditional mutual funds, ETFs can be bought and sold at any time during the trading day, which makes them a flexible and convenient way to invest.
Can You Build a Portfolio With One ETF?
Building a portfolio with just a single ETF is possible, but you must pick the right one to gain exposure to all sectors and remain diversified.
Broad market ETFs provide a diversified portfolio across various asset classes and markets, allowing for balanced and steady growth potential.
The Best ETFs to Build a One ETF Portfolio
1. $VTI: Vanguard Total Stock Market Index Fund ETF
The VTI ETF tracks nearly the entire U.S. stock market. VTI is great for investors who want exposure to the entire U.S. stock market without having to go about picking stocks.
Number of companies held: 4,069
Annual Expense Fee: 0.03%
Pros: If you’re looking for broad exposure to the U.S. Stock Market, this could be a good fund for you.
Cons: Although this fund includes Mid-Sized companies and Small-Sized companies, the fund is still dominated by large company stocks, just like $VOO. It also only includes U.S. related companies.
2. $VOO: Vanguard 500 Index Fund ETF
The VOO ETF is a fund that tracks the returns of the S&P 500 index. The S&P 500 is arguably the most popular stock index for retail investors and is tracked by most people. VOO is also the S&P 500 ETF with the lowest fees, making it an excellent ETF for general stock investing.
Number of companies held: 500
Annual Expense Fee: 0.03%
Pros: The S&P 500 index is one of the most widely watched indexes around the world. It’s commonly used to gauge how the overall U.S. economy is doing.
Since its inception, the index has historically gained around 10% per year (some years less, some years more).
Cons: The fund is only invested in U.S. Stocks.
Although the S&P 500 only includes US-based companies, most of the companies operate in markets all around the world. It’s estimated that S&P 500 companies get roughly 40% of their revenue from outside of the U.S. (Source: Barrons).
If this is a concern to you, you may want to add some exposure to international stocks outside of the United States.
3. $QQQ: Invesco QQQ Trust Series
The QQQ ETF is a widely-traded fund that tracks the performance of the NASDAQ-100 Index. The NASDAQ-100 Index is similar to the S&P 500, except it only tracks 100 companies rather than 500. Since the QQQ tracks fewer companies, it is generally more volatile but offers higher reward potential than the S&P 500 funds.
Number of companies held: 100
Annual Expense Fee: 0.20%
Pros: This fund is great for those who want to take a more aggressive approach when it comes to investing.
QQQ only holds non-financial related stocks. So naturally, QQQ is dominated by tech stocks. QQQ has also historically outperformed the S&P 500.
Cons: QQQ is much more volatile compared to the S&P 500. So if you don’t have the stomach to deal with the additional volatility this fund carries, you may want to avoid QQQ.
QQQ also has an expense ratio of 0.20%. Still relatively low, but not as low as VOO.
4. $VT: Vanguard Total World Fund
VT tracks a basket of global stocks covering 98% of the domestic and emerging markets. So this fund is a great way to essentially invest in the entire global economy.
Number of companies held: 9,293
Annual Expense Fee: 0.08%
Pros: This is a well-diversified fund that covers a mixture of all major economies and emerging economies.
if you’re looking to invest in the overall global wealth, this fund is for you.
Cons: Although this fund is well-diversified, that diversification comes at a cost. This fund has historically underperformed the S&P 500, as seen in the chart below.
Pros of a One ETF Portfolio
Building a one ETF portfolio is the quickest way for investors to invest in the stock market. Broad market ETFs like VOO or VTI allows you to gain exposure to all stock market sectors.
Low costs: ETFs tend to have lower fees and expenses than traditional mutual funds, since they are traded directly on the open market.
Liquidity: ETFs are traded on exchanges and can be bought and sold anytime the stock market is open, giving investors more chances to sell the ETF at a specific price. Mutual funds only update their price at the end of the trading day.
Convenience: Investing in a one ETF portfolio simplifies investing since investors only need to worry about buying a single investment product.
Tax efficiency: ETFs generally have lower capital gains distributions than mutual funds, making them more tax-efficient for investors.
Cons of a One ETF Portfolio
While building a one ETF portfolio is quick and easy, it has its cons. For example, investing in a broad market ETF is generally your best bet, but if you pick a sector ETF, you can easily underperform the overall market.
Limited diversification: Since an ETF portfolio typically only consists of one ETF, it may not provide the same level of diversification as a portfolio with multiple ETFs or other investment vehicles.
Limited investment options: With only one ETF, the investor's investment options are limited to the specific holdings of that ETF. Only picking one ETF can restrict your ability to diversify your portfolio across different asset classes or sectors.
Potential for underperformance: Like any investment, an ETF portfolio can underperform the market or other investment vehicles. If you pick a sector ETF that underperforms the market, you miss out on additional profit.
One ETF Portfolio | Bottom Line
Investing in a one ETF portfolio means choosing to invest in a single ETF designed to track the performance of a specific market or asset class. This approach to investing offers several benefits, including diversification, low cost, and ease of management.
One ETF portfolios are often used by investors who want to invest in the overall market without the need for doing additional research. For example, an investor may choose to invest in a one ETF portfolio that tracks the entire stock market, providing exposure to the performance of all the companies available. While diversity may lower your potential returns, it is a great way to invest passively in the market.
Broad market ETFs take investing in the stock market and simplify the process, allowing investors to spend less time managing their portfolios.
Creating a one ETF portfolio is also the cheapest way to invest passively in the stock market. If you pick a Vanguard fund like VTI, you pay minimal fees and gain exposure to the best companies available.
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Want to keep learning? Check out some of my other blog posts:
Was Cash King During The Great Depression?
Shorting ETFs: ETFs That Thrive In Market Crashes
How Do Higher Interest Rates Impact The Stock Market?
Smart Investments During A Stock Market Crash
As Always: Buy things that pay you to own them.
-Josh
Blog Post: #078
Greetings, investors! I'm Josh, an enthusiast and expert in the world of exchange-traded funds (ETFs) and investment strategies. With a deep understanding of the financial markets and hands-on experience in managing portfolios, I'm here to share valuable insights on creating a one ETF portfolio to maximize your investment returns.
Now, let's dive into the concepts covered in the article:
Exchange-Traded Funds (ETFs)
An ETF, or exchange-traded fund, is a type of investment vehicle that allows investors to access a diversified portfolio of stocks and industries within a single fund. Similar to a stock, ETFs are traded on the stock market. They differ from traditional mutual funds in that they can be bought and sold throughout the trading day, providing flexibility and convenience for investors.
Building a Portfolio with One ETF
The article explores the idea of building a portfolio with just one ETF, emphasizing the importance of choosing the right one for exposure to various sectors while maintaining diversification. Broad market ETFs are highlighted as an excellent choice, offering balanced and steady growth potential across different asset classes and markets.
Notable ETFs Mentioned:
-
$VTI: Vanguard Total Stock Market Index Fund ETF
- Tracks nearly the entire U.S. stock market.
- Pros: Broad exposure to the U.S. stock market.
- Cons: Dominated by large company stocks, U.S.-centric.
-
$VOO: Vanguard 500 Index Fund ETF
- Tracks the S&P 500 index.
- Pros: Widely watched index, historically good returns.
- Cons: Limited to U.S. stocks, potential lack of international exposure.
-
$QQQ: Invesco QQQ Trust Series
- Tracks the NASDAQ-100 Index.
- Pros: More aggressive approach, historically outperformed S&P 500.
- Cons: Higher volatility, focused on non-financial and tech stocks.
-
$VT: Vanguard Total World Fund
- Covers global stocks, 98% of domestic and emerging markets.
- Pros: Well-diversified across major and emerging economies.
- Cons: Historically underperformed compared to S&P 500.
Pros and Cons of a One ETF Portfolio
Pros:
- Quick and easy way to invest in the stock market.
- Lower costs compared to traditional mutual funds.
- High liquidity, can be bought and sold throughout the trading day.
- Simplified investing with only one product to manage.
- Tax efficiency with lower capital gains distributions.
Cons:
- Limited diversification compared to a multi-ETF portfolio.
- Restricted investment options to the holdings of the chosen ETF.
- Potential for underperformance if the selected ETF lags the market.
Bottom Line
Creating a one ETF portfolio is a cost-effective and straightforward approach, particularly for investors seeking passive exposure to the overall market. The article suggests that while diversification may lower potential returns, it's an excellent way to invest passively. Broad market ETFs, such as those offered by Vanguard, simplify the investing process, allowing investors to spend less time managing their portfolios.
In conclusion, investing in a one ETF portfolio can be a smart choice for those looking for a hassle-free and low-cost entry into the stock market. Always remember, the key is to choose the right ETF that aligns with your investment goals and risk tolerance.
Feel free to reach out for any further insights or explore my other blog posts for continuous learning. Happy investing!
