Topic: ETFs

Here’s how to build the best conservative ETF Portfolio for maximum long-term gains

canadian etfs

Building the best conservative ETF portfolio includes being wary of many “new” ETFs, These will raise your risk, but not likely your returns

The best conservative ETF portfolio will be comprised of low-cost, tax-efficient ETFs. That’s the best way for investors to make money in the long term.

ETFs give investors the broad market exposure of a traditional mutual fund, plus the ability to trade at will on stock exchanges with nominal fees.

We still feel that investors will profit the most with a well-balanced portfolio of high-quality individual stocks, but ETFs can also play a role in a portfolio. Here are some tips on how to find the best performing conservative ETFs.

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Learn how you can build the best conservative ETF portfolio for maximum investment returns

Conservative investing is an investment strategy that involves a focus on lower-risk, predictable and stable businesses. This strategy typically involves the purchase of blue-chip stocks and other lower-risk investments. A conservative investing approach also means building a well-balanced portfolio gradually, over time. At the same time, the number of stocks in your portfolio will depend on where you are in your investing career.

In our view, your goal as an investor, particularly if you follow a conservative investing strategy like the one we recommend, is to make an attractive return on your investments over a period of years or decades—but with less risk. Failure means making bad investments that leave you with meagre profits or losses.

Unsuccessful investors can still make some profits. They just don’t make enough to offset the inevitable losses and leave themselves with an attractive return. For instance, if you focus on the idea that you never go broke taking a profit, you may be tempted to sell your best investments whenever it seems the investment outlook is clouding over.

Learn the characteristics of the best conservative ETFs and you will be able to build a strong portfolio

The best conservative ETFs offer well-diversified portfolios with exceptionally low management fees.

However, we think you should stick with “traditional” ETFs. Traditional ETFs follow the lead of whoever sponsors the index, although the sponsors do from time to time change the stocks that make up the index. They also can tinker with the rules for calculating the index.

ETFs change their portfolio holdings to reflect these changes, without considering the impact those changes may have on the performance of the ETF portfolio.

However, when an investment product faces booming demand as ETFs do today, investment companies try to expand sales by creating “new” versions of the underlying formula.

These “new” ETFs use a conventional stock-market index as a base, but add their own refinements. These refinements are tailored to current investor preferences or prejudices. That’s distinctly different from traditional ETFs, which, as mentioned, simply aim to mimic an index. These newer, theme varieties may attract attention—and sales—but they frequently carry higher management expense ratios (MERs).

In some cases, the strategies of the new ETFs may provide investment benefits but not consistently. In fact, they will most likely hurt your results in the long run. The worst cases are bad enough to turn investor profits into losses. One sure result is that the higher MERs will cut into the value of your ETF portfolio every year.

Another drawback with many new ETFs is how much easier they make it for investors to act on an urge to invest in a specific stock or stock group—without doing any messy and time-consuming research. For example, if you want to invest in, say, cryptocurrencies or Swedish stocks or wind-power stocks, or any of hundreds of other stock groups, you can almost certainly find an ETF that will let you act on that urge. However, that may not produce the best results.

Use these three tips for building the best conservative ETF portfolio

  • Know how broad the ETF’s holdings are. The more stocks it holds and the more it’s diversified across the five sectors, the less volatility it may have. For example, a sector-based ETF such as one that tracks resource stocks alone is likely more volatile.
  • Know the liquidity of ETFs you invest in—how many units a day they trade on average.
  • Consider buying ETFs in a lump sum rather than in periodic small amounts to cut down on brokerage fees.

The best conservative ETF portfolio will include sound diversification

Diversification should be a key focus for investors looking to build the best conservative ETF portfolio. And stock diversification is one of the most attractive features of ETFs. With an ETF, an investor is accessing all the stocks in an index.

When you buy ETFs, you’ll also want to look at the sector balance of the stocks in the ETFs. That way, you can be sure that your overall ETF portfolio is also balanced.

If you diversify as we advise, you improve your chances of making money over long periods, no matter what happens in the market.

Follow our three-part Successful Investor strategy to buy stocks—or ETFs that hold those stocks—and you will have a better chance for superior long-term gains

  • Invest mainly in well-established, mostly dividend-paying companies;
  • Spread your money out across most if not all of the five main economic sectors;
  • Downplay or avoid stocks in the broker/media limelight.

What kind of experience have you had with holding ETFs over the long term? Have you found them to be profitable?


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