Is there any vehicle other than direct stock investment which is safer and helps me be well-diversified? How to get a list of all possible permutations and combinations of all types of investments and how to rank them in order of your preference: 1 or 2 or 3 year return; volatility (market swings); risk of loss; industry or sector or geographical diversification; and last but not the least, active management by an astute fund manager or just blindly following a stock market index?
Create an ETF portfolio builder tool with ETF asset allocation strategies
- Quick summary of steps to create an ETF portfolio builder tool
- How to select the best ETF – properties, risk & ratings
- ETF Relative Strength screener
- The best etf portfolio Allocation
- ETF asset allocation strategies with ETF portfolio examples
- Mind your (co)relationship – ETF correlation
- Frequently Asked Questions (FAQ)
This is the part II post in the series of posts on how I created a ETF portfolio builder tool to find the most profitable ETF funds. The first post describes the introduction to the process I followed to identify the top ETF in the US market.
If you have landed on this page accidentally (or intentionally) and would like to see the first part of this Step-by-step Do-It-Yourself guide, please find the link below.
Evaluate ETF list with Diversified ETF Portfolio example using FundSuperMart fund selector. ETF selector. Best Stable ETFs 2021. Mutual Funds and ETFs difference
I will right now recommend the best ETFs to invest in 2021 according to my research and investment. However, I would suggest that instead of using recommended funds, you should build your own ETF portfolio. You can follow the method described below to invest in a diversified ETF portfolio.
I would suggest following best ETFs to buy now for stable and consistent returns.
ARKW (or ARKK), AIQ, CHIS, CHIH, RWGV, FPXI, GLTR (or GLD), CXSE, OGIG, TAN, GBTC
Why this list?
- I feel you should diversify across these markets to invest for long term: US and China
- Invest in sectors which have a bright future for several years: Tech, Health, Green energy
- Hedge with safe haven like Gold
- Takes care of ETF correlation issues for the best ETF portfolio allocation.
- Buy some leveraged ETFs like RWGV and Bitcoin to boost your returns exponentially in rapid upmove
- Diversify with stable sectors like FMCG or consumer staples (China FMCG is better than US FMCG in terms of retailer margins)
In the later half of this article, I have given several ETF portfolio examples using ETF from the aforementioned list
One question before you start researching or evaluating this perfect ETF portfolio. How do you define “best ETFs”? For example, do you prefer ETFs which are:
- well rated by rating agencies like Lipper, MSCI
- low volatile funds,
- funds with highest returns,
Briefly reiterating below what I wrote in the earlier post → I used the Excel file ETF 1.0 that I created by downloading ETF portfolio builder data from Fundsupermart.com. After putting it through an extensive filtration process described clearly in the first post, I will now illustrate the long and hard multistage interwoven process taking roughly 6 months to learn and in turn helping you turn into a better investor … phew!! …
Just kidding !!
The process, as I explain, will be far easier.
Unlike a robo advisor that does this automatically for you, in this article I will hand-hold you with this DIY guide to create an ETF portfolio builder. This is a comprehensive guide that you can read and completely understand in less than 6 hours (not 6 months).
Why etfs are good? Know these ETF Advantages before putting your money elsewhere. 9 best advantages of ETFs reveal how ETFs are the best financial instruments
I would still suggest you to see the first part of this Step-by-step Do-It-Yourself guide.
How to build your own ETF portfolio?
I have listed the steps to build your own ETF portfolio along with ETF asset allocation strategies for my DIY ETF portfolio builder tool
- Start analysis with category, sector & geograph
- Assess all exchange traded funds on parameters, properties & statistics
- ETF Relative strength and correlation between ETFs
- Best ETF portfolio allocation and Portfolio backtesting
The websites I used for further analysis are ETFscreen.com, etfDB.com, ETF.com, dqydj.com, markets.ft.com. I have trading accounts with Interactive Brokers & Saxo markets. I used them to check ETF parameters, live spreads, regulatory restrictions, trading volume, and margins.
If you wish, you can also create a sectoral portfolio builder by focussing on ETFs from a particular sector.
1. Start analysis with category, sector & geography
As mentioned in the earlier post, I start with picking up a category + sector + geography combination e.g. Equity-Consumer-US.
Following is an image from the previous article to help you recollect the ETF 1.0 Excel file. The screenshot below is an excerpt of list of Equity-Consumer ETFs.
2. Assess all ETFs on fund parameters, properties & statistics
Out of the exchange traded funds selected in previous sections (ETF 1.0) for above combination, I carefully evaluate each ETF to create my ETF portfolio builder tool:
- Examine following ETF parameters from morningstar.com, markets.FT.com or my interactive brokers account.
- Historical volatility,
- Lipper & Morningstar ratings,
- MSCI ESG Analytics ratings,
- Expense ratio,
- Standard deviation,
- Alpha, and others
- Compare 3 or 5 year performance of automated periodic investments (SIP / RSP)
- Visually observing their 1y — 5y chart on TradingView or Fundsupermart charts websites
3. ETF Relative strength strategy and ETF correlation
I then compare all filtered exchange traded funds using 2 very useful measures: ETF Relative Strength and correlation. Ultimately, I have to choose the best ETFs out of so many falling under same category+sector+geography combination. So, I further evaluate these exchange traded funds on the following 2 points to get a preferred ETF list.
- Pick ETFs replicating the top-rated ETFs but at a NAV much lower to ensure systematic periodic investment
- Select ETFs with smaller lot size or minimum units for sale or purchase. This is essential if you want to fill your bucket drop by drop.
- It’s easier for everyone to buy an ETF with a NAV of $3.5 compared to an ETF with a NAV of $296.
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4. Portfolio backtesting
I do a final check, and then I create a portfolio using the best ETF portfolio allocation. I do thorough backtesting using the following methods:
- Download last 5 years (or since inception if less than 5 years old) of daily price data from Yahoo Finance and run excel simulator to figure out the best backtested ETF portfolio.
- I also plot all my ETF portfolios on www.tradingview.com to visually inspect my Davison for a final check.
- Plot a portfolio of a combination of ETFs e.g. (ARKW + VIXM + GLD/5) to see performance over several years.
Now I will give you the detailed information for each step mentioned above.
ETF Parameters – properties, risk & ratings
Before you proceed, I would suggest you read about ETF pros and cons to get a taste of whether ETFs match your expectations or not
10 disadvantages of ETFs along with 7 ETF benefits not publicized or disclosed before investing. ETF NAV vs price. Risks and disadvantages of leveraged ETFs.
For every category + sector + geography combination e.g. Equity-Consumer-US, I inspect all exchange traded funds from the ETF 1.0 list (described in my previous post) on the following parameters:
a) Historical volatility vs. 1 year return
As the first step in detailed analysis of ETFs to build my own ETF portfolio, I select ETFs with low historical volatility and high 1 year return.
For instance, lets say there are 2 ETFs we want to compare.
- E1 has historical volatility =23.2 and 1 year return = 34.8%
- E2 has historical volatility =23.8 and 1 year return = 28.2%
Which one would I pick? I would pick E1 over E2. Why? E1 offers higher return for similar risk.
However, if E2 has historical volatility =20.2 and 1 year return = 28.2%, then I would be skeptical of finalizing E1 while building my ETF portfolio and would rather put both on radar before continuing to the next examination steps.
b) Lipper, Morningstar & MSCI ESG Analytics ratings
In my ETF portfolio builder tool, I consider a good exchange traded fund as the one with better rating – Morningstar, Lipper, MSCI. Within a category + sector + geography combination, I would generally choose the 3 top rated ETFs. The following screenshots show some ETFs with their Morningstar, Lipper, MSCI ratings.
Based on the above ETF ratings, I will pick FDIS, VCR, and RTH only. If you observe, the consistently most profitable ETF funds in 2020 and before have 4 or 5 star ratings from Lipper, Morningstar and Fidelity.
c) Expense ratio
It is the expense incurred in the exchange traded fund’s administrative and other operations. More about it is given in the following Investopedia article.
Given all parameters are very close to each other, one should prefer a fund / ETF with lower expense ratio. “Lower” here doesn’t necessarily mean that an easy choice can be made based on a difference of 0.1%.
For example, say xETF and yETF are two exchange traded funds with expense ratio of 0.85% and 0.95%. To find the most profitable ETF funds in 2020, I don’t think we should have any predefined value or rule for Expense Ratio. As per my discretion in this example, I will put both xETF and yETF on radar in my ETF portfolio builder and continue looking at other parameters.
If you are too worried about expense ratio and want to invest for a short term, CFDs (contract for difference) can easily come to your rescue. CFDs offer really cheap 24-hour trading on same stock market index as tracked by an ETF.
d) Fund ratios – beta, sharpe, SD
I am talking about common fund ratios easily available on any Fund selector website e.g. Beta, standard deviation, Sharpe ratio, and ETF correlation. They all play a major role if you want to build our own ETF fund selector. I feel Beta plays a crucial part in fund selection because it helps exhibit how a fund moves with respect to the market. Since I am not a conservative investor, I do not entirely focus on funds with low betas.
However, since I am willing to take limited risk for slightly higher returns, I look for beta between 0.8 to 1.1, which probably is the case with most investors.
For periodic investments like SIP (systematic investment plan) for dollar cost averaging, a high beta fund with high returns (Sharpe ratio & alpha) is preferable.Tweet
Standard derivation, also called volatility in general, portrays the ability of the fund to survive financial storms and nose-dive markets. If Standard deviation of a fund is high, it would rise very high and fall too deep. The result is that the returns would not be efficient in long-term.
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e) Fund performance
Now how do we determine fund returns to gauge the best ETF portfolio allocation for our ETF portfolio builder? In two ways — annualized returns against benchmark over 1, 3, 5 years, or cumulative return over a set period.
- Annualized returns against benchmark give you a consistent performer kind of feeling e.g. 1-year return against benchmark (e.g. S&P 500) = +15.0%, 2-years return against benchmark = +13.5%, 3 years return against benchmark = +14.5% and so on.
- You can also measure yearly returns e.g. returns in 2018, 2019, 2020. But don’t forget to measure this against a benchmark. Generally if a fund is giving consistent returns over its benchmark, then it is considered a fund worth investing.
- Cumulative returns over a set period are simply the total return between start and end date.
Apart from Yahoo Finance and Morningstar, one may see Cumulative returns for any exchange traded fund over the last 1 week, 1 month… to 5 years on the following website.
Upon clicking the above link, an ETFdb.com page will load which contains market data, reference data, statistics, comparisons, charts and so on for QQQ.
One may also use www.dqydj.com to see annualized returns, both as a lump sum starting amount and as a Systematic Periodic Investment.
Simply enter the ETF ticker, Investment amount, Start and End dates to calculate lump sum return. For systematic periodic return, the Toggle Advanced button opens up few more options: tick the Periodic Investments checkbox, select the Period and Amount.
Clicking the Calculate Return button will show a chart of total invested value over the selected period. The values in Final Value($) and Annual return(%) are the key ones I note down. I use this Annual return(%) as one more parameter to compare between similar Exchange Traded Funds.
For every category + sector + geography combination, I finally select a few ETFs based on the aforementioned parameters to build an updated Excel sheet. I then move on to using other analytical & visual tools to finalize my selection.
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ETF parameters I explained above can also be seen at markets.ft.com. However, I simply wanted to share these brilliant websites for research and analysis (as explained in several points above). Had I shared the FT website details in the first line itself, most readers would have skipped the excellent features found on other websites.
This following screenshot now shows how the Excel file looks with few of what I would call as the most profitable ETF funds in 2020. I call it “ETF 1.1”.
Column K & L contain Morningstar and Lipper ratings respectively. Blue highlighted columns M & N contain the 1-year Standard deviation for fund and category respectively while columns O & P contain the 1-year Beta for fund and category. All this information is taken from markets.ft.com.
The last column, named 3yrSIP, is the return as per Systematic Periodic Investment as calculated from www.dqydj.com.
So I selected 3 ETFs from Equity+Consumer+US combination.
However since I have to diversify across categories, sectors, and geographies, I will select only 1, or max 2 ETFs. Let’s see further how I use ETF Relative Strength and charts to narrow down my selection from 3 to 2 Exchange Traded Funds.
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Relative Strength screening
Relative strength (RS) is a measure of the price trend of an instrument compared to another one. It is calculated by taking the price (or returns) of one asset and dividing it by another. E.g. ETF Relative strength of ARKW vs. QQQ is calculated as RS = ARKW/QQQ.
I use Relative strength screening strategy via 3 methods:
- I do initial Relative strength analysis and screening using ETFScreen.com
- I plot ETF charts comparison at Fundsupermart charts and other websites to do act as a visual ETF Relative strength screener.
- Another set of ETF charts comparison by plotting chart of Relative strength strategy as “ARKW/QQQ” in TradingView.com
This comparison gives me a good opportunity to identify the best available and probably the most profitable ETF funds in 2020.
You can design your own visual ETF Relative strength screening by doin ETF charts comparison on many websites including the most popular Yahoo Finance, Morningstar, and the most pervasive Tradingview.com.
For now, I will rather simply use Fundsupermart charts as an initial Relative strength screener and analysis. E.g. for MGK:
In this Fundsupermart charts screen, to start with your Relative strength screener strategy, you can choose to display a chart of a single Exchange Traded Fund or do a multiple ETFs charts comparison e.g. I plotted MGK and S&P 500 index for comparison. By default, all selected ETFs will be plotted in the chart section. One can however click on the ETF name at the bottom of the chart section to hide its display.
This helps to visually compare chart of one ETF relative with another to judge the following for a set of ETFs: annual or monthly range, volatility (beta), seasonal price movement, correlation with other ETFs, intensity of up- or down-move with respect to index (alpha) and many such parameters.
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To further filter in my ETF portfolio builder MS Excel tool, I also used other charting websites for ETF charts comparison like charts on ETF.com, TradingView and Yahoo Finance. In ETF.com charts, one can plot Price charts and Total return charts for specific periods while comparing return values with pre-defined indices. A plot of multiple ETFs on a single chart, similar to Fundsupermart charts, is also possible. But the agility, smoothness and easy-to-click & load nature of Fundsupermart charts is what appeals to me most.
From here on, I will intermittently show you a few ETF portfolio examples of ETF portfolio Relative strength screener I created using my ETF portfolio builder tool.
Plotting a basic ETF portfolio or Relative strength screener strategy is really easy in TradingView. I generally plot an ETF charts comparison to see ratio of 2 instruments to screen ETF Relative Strength of one ETF vs. the other. Sample screenshots of ETF Relative Strength comparison between FDIS vs. RTH and ARKW vs. QQQ are shown below. You may click any image to enlarge and see in full size.
It is quite easily visible from the ETF charts comparison that ARKW is a better performer, especially lately, while the FDIS generally ranges between 0.45 and 0.39 and has recently had a sudden fall and sharp recovery to move back into the range. This way, one can figure out which is a better ETF in the long run.
One important note: FDIS is an ETF in consumer discretionary segment whereas RTH is an ETF in the consumer staples segment. These two are not comparable. However, FDIS and VCR fall in the consumer discretionary segment.
Below you can see another screenshot of FDIS vs VCR on the left and a screenshot of CHIQ (China consumer discretionary) vs CHIS (China consumer staples) on the right. You may click any image to enlarge and see in full size.
You can clearly see that FDIS and VCR go hand-in-hand. The recent shoot up of FDIS vs. VCR might suggest that FDIS is a better performing ETF. However, if you notice clearly, the sharp move is just 0.01 points i.e. from 0.25 to 0.26 which is actually insignificant. But why I preferred FDIS over VCR is its lower NAV for systematic periodic investment.
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Lastly, to reaffirm my selection, I use another brilliant Risk-Return chart from www.ETFScreen.com. Its a very simple X-Y chart with the yellow bubble representing the ETF I am researching (MGK in this example) while other blue dots are Return vs. volatility graphs for the list of ETFs mentioned in the text box. You may change the ETF list in the textbox to research on a list of your preferred ETFs vs. a selected one.
This graph clearly shows whether my selected ETF is better or worse than other ETFs I wish to compare. If I can find a better (higher return, lower volatility) ETF as a blue dot, I will rather research a bit more on that while moving my previously selected ETF out of the final list.
After all this analysis, I choose the most promising ones, highlight them in green text in green cell color and now call my list “ETF 1.2”.
The final List of ETFs and Asset Allocation strategies
So, have I finalized my ETF portfolio builder using the best ETF portfolio allocation? Is there something missing? Almost but not final yet. The last step is to consider my investment appetite, horizon and regularity. My prime reason for creating this list was to keep investing regularly and hold for the next 5 years unscathed by the market moves in near or far term.
My investment appetite (portfolio risk and amount) is based on the following asset allocation strategy. Note that this is not my asset allocation strategy for my entire wealth but only for this goal of 5 year periodic investment in ETF. Asset allocation strategies for your entire wealth are beyond the scope of this blog post.
Now you may ask how to decide between same category + sector + geography ETFs? For instance, decide between Gold tracking ETFs: IAU, AAAU, GLD, and between the US consumer staple ETFs: FDIS & VCR. They are a mirror of each other since they track the same index.
My investment allocation and appetite permits me to invest only 10% ($100 out of $1000 monthly) in gold and instead of investing all $100 in just 1 day in a month, I would to split it over several days to capture market movements (automated periodic investment; not trying to time the market) and possibly a better price. So instead of investing in GLD (NAV of US$ 175) I will instead invest in IAU or AAAU (NAV of approximately US$ 18). This gives me an opportunity to invest spread my monthly purchase to 4–6 times a month.
Minimum Lot Size – the opportunity and the monster
Another reason to choose mirror ETFs for the ETF portfolio builder is the minimum lot size required. A simple example of an illusion in this approach is to choose between 2 Nasdaq INdex Tracking ETFs. The first one being the ubiquitous QQQ. The second one is a really cheap HKD denominated ETF: 3086 HK, priced at just 22.38 HK$ (= US$ 2.9) per unit. Now if I invest through this ETF, I get a chance to buy 1 quantity on many days in a month or buy say 5–6 quantity every week to fulfill my desire of investing $80–100 monthly in NASDAQ.
It seems brilliant but only in theory since the minimum quantity to buy 3086 HK is not 1 unit but 200 units. That makes it a single purchase of roughly US$ 770. Following is a screenshot of an order from my account in interactive brokers.
If you are in UK, the best option for you is to spread bet. Spread betting is a relatively new instrument which is exempt from UK income tax and offers trading on mostly the same underlying index as the one tracked by your favorite stock market index tracking ETF. Another type of instrument for short term trading is CFDs. They are also expempt from several charges like stamp duty, STT etc.
Apart from using this guide to create your own ETF portfolio, you can also find various personal investments management techniques by watching the following videos from LinkedIn Learning. Start a 30-day trial now!
ETF asset allocation strategies
In this section, I will briefly show you some ETF asset allocation strategies using funds from my ETF portfolio builder tool. You can actually visualize a very basic portfolio or ETF asset allocation strategy in TradingView and do an ETF charts comparison between your portfolios.
I will show the detailed explanation and several more examples in my upcoming article, to be released in mid year 2021. To keep updated of this and variety of other knowledge articles, please follow me on social media and subscribe to my mailing list (psst… not more than 1 mail per week) using the sticky orange form on the right (or the top bar if you are on mobile).
Let’s assume the ETF portfolio builder tool showed the best ETF portfolio allocation as ARKW & XITK (US tech Equity), FPXI (Global Large cap), CHIS (China consumer Equity), VIXM (US volatility), SWAN (Global hedged Fixed income), and GLTR (precious metals).
- First a plot of just ARKW:
- Now a kind of a hedged ARKW i.e. a mix of ARKW & VIXM – buy 2 units of ARKW hedged + buy 3 units of VIX (medium term)
- Now plot a chart of ETF relative strength comparison strategy between hedged XITK vs. ARKW
- Finally, a plot of portfolio using ARKW, FPXI, IAU and hedged using VIXM – buy 1 unit each.
Note: None is these combinations of ETF is any form of recommendation. Please use your own judgement, analysis, research and discretion in creating ETF asset allocation strategies. After all, it’s your own hard-earned money.
Mind your (co)relationship
One last point — you should be careful on the ETF correlation aspect of your portfolio. An ETF portfolio built on asset allocation strategies should be well diversified. To create such an ETF portfolio, we need to have the best ETF portfolio allocation while keeping in mind that they should also have the least correlation with other ETF.
No point building an ETF portfolio of 5 ETFs that are highly correlated to each other. Why would you want to put all your eggs in one basket?Tweet
ETF correlation is often overlooked when you hear experts talk about the best ETF portfolio allocation over news channels. The following screenshot shows an example of an ETF correlation matrix. These ETFs are from different sectors and geographies. Keeping ETF correlation in mind ensures I create my ETF portfolio across sectors, categories and geographies. Otherwise, as an example, if I make a 5 ETF portfolio consisting of QQQ & ARKW (high ETF correlation) in equal ratio forming 40% of my entire portfolio amount (assuming 5 ETFs with equal $$ in each), a minor shock to Tech stocks will give a big jolt to even the best ETF portfolio allocation. So I urge you to build an ETF correlation matrix and keep your ETF correlation in mind while creating your own ETF portfolio.
If you are not comfortable doing all of this research and would prefer an automated solution, then the best tool for you is robo-advisory services.
Top ETF News
Series of posts on creating a portfolio of the best ETF to invest
I created this post as a part of a series of posts with the sole intention of sharing my knowledge and experience in:
- searching for good quality investment vehicles
- analyzing and researching on choosing between various options from those
- finding an easy, scalable and manageable way to invest in those
- creating and managing my own portfolio while tubing to find a balance between investment expectations, regulatory hurdles and reality
- ensuring the portfolio is in accordance with general asset allocation principles as per my age, investment amount and risk appetite.
The same post was first written on Medium.com. Please click here to check out my initial post on medium.
Thanks for reading this post. I have written several other such investment related articles on this website. Please visit the following related posts as shown below.
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Frequently Asked Questions (FAQ)
Should I invest in ETF or index fund?
Index fund vs. ETF question is a common question always popping-up in the mind of any beginner to investing.
Key differences between an ETF and index fund:
1. ETF can be traded throughout a day whereas Index Mutual funds are purchased or redeemed based on day’s closing price
2 Generally ETFs do not force a restriction on minimum investment required. You can buy even 1 unit of ETF whereas Index Funds have some minimum investment requirement
3 Expense ratio & other charges are generally higher in Mutual funds. A typical index based Fund has an expense ratio of between 0.2 to 1% per annum whereas an ETF tracking the same index has an expense ratio of between 0.05 to 0.2% per annum
4. Advisors vs. self-researched investment: Most advisors will advise you against ETFs and persuade you to buy Index Mutual funds. I hope you understood the reason by reading the 3rd point.
5. ETFs can only be bought through a trading account. Mutual funds can be bought through an investment account, which has far less account opening formalities, regulations and restrictions than a Trading account
A beginner can invest in either ETF or index fund. Both are vehicles of diversified investment.
Passively managed Index ETF or Index mutual fund both
– are well-diversified,
– have low expenses,
– have low volatility,
– mirror the broader market in general, and
– offer good long-term returns
Is ARK ETF overvalued?
Whether ARKW & ARKK are overvalued or a good or bad buy is a question that needs investors discretion. A rising sector rises beca
use of increasing demand. A good fund manager knows the market well and takes positions based on market phases and cycles. Investing in high beta companies doesn’t mean you are doomed and one day you will lose all your capital. An overvalued fund or stock can remain overvalued for a really long time. It all depends on whether the stocks / ETFs selected by you / fund manager are ethical growing businesses in emerging sectors.
ARKW & ARKK I think are here to stay. They will have to face their share of downfall if the market plummets but seeing their fall & subsequent rise and fund manager’s hedge in the first quarter of 2020, I can safely assume that they are quality ETFs
Which ARK ETF is best?
ARKW & ARKK are high performing high volatility ETFs.
ARKK & ARKW are high performing funds by ARK research. Those funds invest in high beta Tech companies providing services in areas like artificial intelligence, deep learning, big data, cloud computing, cybersecurity, and blockchain technology.
Since this sector in itself in its infancy compared to established sectors like FMCG, its is bound to have companies with high growth & high volatility (clicking this opens a introduction page on NFT, the latest buzzword in cryptocurrency) .
Tech sector has a been a strong performer since last 30 years and new-age companies in this sector will surely rule the roost. ARKW & ARKK ETFs provide retail investors a brilliant opportunity to safely invest in these companies for the next 5-10 yeaech