It is important for each individual and any trader to minimize risks and spread them over many investment funds and assets. This can be easily done through ETFs, which combine different asset classes and sectors. Here is the best guide on using ETFs to assemble a diversified investment portfolio.

1. Understand the Basics of ETFs

ETFs are pooled investments that own a basket of securities such as equities, fixed-income instruments, or even physicals. Like individual stocks, ETFs can be bought and sold on the stock exchange, so owning one is never a problem. The major benefit of using ETFs is that they can invest in many products without going out and buying each one, thereby providing immediate diversification.

2. Start with Broad Market ETFs

The easiest way of diversifying is through investing in market tracker ETFs. These ETFs represent large indices, such as the S&P 500 index, thus availing broad market sectors. One is the Vanguard S&P 500 ETF (VOO), which tracks the S&P 500, focusing on some of the biggest companies in the USA at a very low cost per share. International markets are well provided in the iShares Core MSCI Total International Stock ETF (IXUS).

3. Sector-Specific ETFs for Targeted Exposure

Investing in either broad market ETFs or select sector ETFs to build your portfolio is better since sectoral ETFs help narrow down the growth sectors. Technology Select Sector SPDR Fund (XLK) tracks the technology sector that is rapidly growing, and Health Care Select Sector SPDR Fund (XLV) tracks companies in health care. These funds are very good for profiting from trends in the industry without risking all of your money on one company.

4. Add Bond ETFs for Stability

Investing in bond ETFs balances your investment and is useful during unstable market situations. These fixed-income securities offer monthly income and diversify the risks of a portfolio. Bond ETF: Exchange-traded funds that pool investment funds to purchase bonds. Fixed-income investments work well for investors seeking monthly income and to reduce overall portfolio risk. Popular bond ETF is the iShares Core U.S. Aggregate bond, which includes investment in U.S. government and corporate bonds. Another proper recommendation is Vanguard Total Bond Market ETF (BND), which also contains the value of the total U.S. bond market.

5. Consider International and Emerging Markets ETFs

Expanding operations across the world can minimize dependence on home-country economic factors. For instance, there are international ETFs like Vanguard FTSE All-World ex-US ETF (VEU) that invest in developed countries other than the U.S., iShares MSCI Emerging Markets ETF (EEM) targets countries that are at an initial stage of their growth and hence have a higher potential for growth.

6. Further diversification into real estate ETFs

Real estate investment trusts, or REITs, are another example of a portfolio diversification opportunity, and ETF implementation of this asset is a snap. Vanguard Real Estate ETF or VNQ is an ETF that offers diversification in real estate without owning properties but is a pure REIT of the United States. These ETFs can provide constant returns through dividends, making them an attractive investment spot.

7. Rebalance Your Portfolio Regularly

Depending on the performance of the markets, some of the segments of your portfolio may expand or contract. Portfolio rebalancing is important because you can maintain the required diversification and achieve and maintain the set investment objectives. For example, if your stocks do well compare to bonds, you should sell off some of the stock ETFs and purchase bond ETFs.

Conclusion

Selecting ETFs to tap risk diversification and improve portfolio returns is advisable. If you have a diverse portfolio that invests in broad market ETFs, sector-specific bond ETFs, and international ETFs, you know you have set yourself up well for the future. Besides that, rebalancing the portfolio and adding real estate ETFs can further increase diversification efforts and remain optimistic about long-term financial goals.

（Writer：Lorik）