3 Steady Growth ETFs to build your portfolio around

Exchange Traded Funds (ETFs)
The 3 best ETFs to start building your portfolio!
Are you thinking of starting your investment journey but you can’t figure out where to start? In this blog we will be discussing three well-diversified ETFs which you are able to add to your portfolio as a building block based on your own preferences. If you aren’t completely sure yet what Exchange Traded Funds (ETFs) are and why we buy them, don’t worry, you can read all about them in the Keys to Investing E-Book!

Let’s start with what Exchange Traded Funds actually are. In a few words, investing in ETFs is an accessible, passive and diversified way of starting your investment journey. Exchange Traded Funds, or, ETFs can be seen as a basket of securities traded on an exchange. ETFs can track everything from commodity prices to certain indexes or even specific strategies. This enables you to easily diversify yourself by owning multiple underlying assets. If you were to invest $100 into a technology ETF, the fund manager would distribute your $100 over all the holdings in the fund. For example, that means that you would have invested $6 in Apple, $4 in Microsoft, $3 in Tesla and so on. Imagine having to buy all these shares individually, that would cost you thousands! Why buy a piece of the pie when you can buy the whole pie!

We will be looking at three of the most basic ETFs that are available and we will discuss their main holdings, the expected returns, and the costs associated with them. For our personal portfolio we aim for “steady growth”. Meaning, we want to sit in the middle of two extremes. The “boring” dividend companies and the high-growth small cap companies. With this “steady growth” strategy we combine both the expected growth of the more risky and innovative companies with the stable cash flow and dividend paying safety of the more established companies. We believe this is the best way to create a well-diversified long-term sustainable portfolio. This way, you will be able to sleep at night by holding great companies during pessimism while not having too much fear of missing out (FOMO) during optimism. Here we will discuss three Exchange Traded Funds which are also held in the Keys to Investing ETF Portfolio!

Firstly, The Vanguard FTSE All-World UCTS ETF is an ETF with physical replication which covers stocks from all over the world. Despite this, the fund is still heavily weighted towards the United States with more than 50% of its holdings there.The biggest holdings within the ETF are thus also the biggest US stocks: Apple, Microsoft, Amazon, Alphabet etc. The diversification with regards to difference in sectors is a lot better. 21% in Technology, 14% in Financials, 12% in Health Care and 11% in Consumer Discretionary. The returns in 2022 including dividends came to -13% with +28% in 2021. 
The dividend of this fund averages almost 2 euro’s per share which comes to a yield of almost 2% at the current share price* of 100 euro’s. This dividend is fairly risk-free. With regards to the expenses, the expense ratio of 0.22% is fairly low. The fund is mostly traded in EUR but is available in GBP and USD through the London Stock Exchange (LSE). The extra exposure to stocks all over the world plus the reasonably higher dividend yield places this fund as the least risky (in terms of volatility) of the three funds we will be discussing.
Next, we have the Vanguard S&P 500 UCITS ETF. This ETF mimics the S&P 500 index which is one of the most famous indexes in the world. The difference with the All-World ETF is clear, the S&P 500 ETF holds only the 500 biggest US stocks instead of the whole world, this means it also holds the stocks discussed prior. This takes away some of the diversification benefits and thus holds more risk. However, this will mean more exposure to the more liquid and historically better performing US stocks. This is also seen in the 1-year performance which is about 40% for the year 2021 and -13% for 2022. The expense ratio amount to about 0.07% which is arguably a lot better than the All-World ETF, however, at the current price* of 71 euro’s, the dividend per share is significantly lower than the All-World ETF at 0.99 (1.38%).
Lastly, we have the Invesco QQQ Nasdaq-100 UCITS ETF. This fund physically replicates the NASDAQ 100 index. This index consists of the biggest technology-esque stocks in the US. The index holds a stake of about 55% in just 10 stocks. Microsoft, Apple, Amazon, Alphabet A & C, Nvidia, Tesla, Meta, Pepsico & Broadcom. This ETF is by far the least diversified out of the three and holds the most risk. This stems from the number of holdings (+- 100), the nature of the stocks held (techology focussed), and the geographical focus (US only). However, this extra risk is also seen in the higher returns for the year 2021 and before. The expensio ratio at 0.30% is also higher than the two ETF’s discussed prior. All in all this is a good way to gain exposure to the big US tech stocks without having to buy them individually.
As you can see, all the ETF’s cover the main US stocks. This is because these stocks are the biggest in each of their categories (All-World, S&P 500 and Nasdaq). The beauty is that you can choose to hold them in whatever composition fits your risk preferences. If you prefer being very diversified and do not like to take a lot of risk, you might want to look at the All-World ETF. If you prefer a bit more exposure to the US stock market and thus be a bit less diversified on a country level, you could look at the S&P 500 ETF. However, if you are more confident in the technology sector and you are content with taking a little more risk in order to get some higher returns, look at the Nasdaq 100 ETF. 

Always keep in mind that there is quite a significant overlap in the largest holdings of these funds. Meaning, if you were to hold all three of these ETF’s, your portfolio performance will already be largely influenced by large individual stocks such as Apple, Microsoft and Alphabet. 

*At the time of writing

This is NOT financial advice

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