How To Build A Diversified Portfolio Using Property and ETF Investment
Understanding how to strategically build a diversified portfolio using ETFs and property investment can be the key to achieving your long-term investment goals.
Leveraging Exchange-Traded Funds (ETFs) is an accessible and simple way to create a diversified investment portfolio.
ETFs offer you a versatile way to spread risk across various asset classes while aligning with your other investments like property. This approach not only enhances your portfolio resilience but also optimises your portfolio for potential returns, making it a great solution if you are looking for ways to overcome market volatility and capitalise on growth opportunities.
In our latest podcast episode, we sat down with Owen Rask who built a multi-million dollar diversified investment education business from the ground up!
Owen shares his unconventional path from farm life to financial guru, revealing his secrets to building a diversified portfolio with ETFs alongside property investments. His inspiring story and refreshing perspective will transform your approach to risk, wealth, and success.
Listen to the episode in full to discover the key differences between financial education and marketing, overcome common investing mistakes, and develop a long-term strategy for achieving financial freedom.
What are ETFs?
Exchange-Traded Funds (ETFs) are investment funds traded on stock exchanges, much like individual stocks. ETFs buy a range of assets and then bundle them into one fund that you can buy shares in, automatically bringing some diversification into your investment portfolio and reducing the risk associated with holding just one or a few stocks.
ETFs are designed to track the performance of a specific index, commodity, sector, or asset class, for example technology or a selection of ASX listed companies. This diversification spreads risk across different companies, industries, or regions, thereby potentially lowering your overall portfolio vulnerability.
Unlike mutual funds, which are priced once a day at market close, ETFs trade throughout the day at prices that fluctuate based on supply and demand. This liquidity and transparency make ETFs a great option if you are seeking more flexibility in your investment portfolio.
ETFs typically have lower expense ratios compared to mutual funds, making them a cost-effective choice if you are just starting out in investing or are wanting to diversify your portfolio quickly.
Benefits of Investing in ETFs
ETFs have several benefits that make them the perfect choice if you are wanting to diversify your property investment portfolio.
Low-cost structure compared to mutual funds
ETFs typically have lower expense ratios compared to traditional mutual funds. This cost efficiency gives you higher returns over the long term, as less of your investment is spent on fees.
Diversification across various asset classes and sectors
One of the biggest benefits of ETFs is their ability to provide instant diversification. By holding a basket of assets that fall into a certain index or sector, ETFs spread risk across different asset classes such as stocks, bonds, commodities, or even specific sectors like crypto or healthcare.
This diversification reduces the risk of big losses from a single investment, making the whole portfolio more stable.
Accessibility and ease of trading
ETFs trade on major stock exchanges just like individual stocks, allowing you to buy and sell them throughout the trading day at market prices. This liquidity provides flexibility, enabling you to react quickly to market changes or rebalance your portfolio if you want to.
ETFs vs. Property Investment
Property investments are usually a stable, long term investment and offer potential rental income. However, investing in property does require significant money upfront and can be harder to sell, meaning you may have to wait for your returns when you want to cash them in.
ETFs, on the other hand, provide immediate diversification with much lower minimum investment requirements, making them accessible to more people than buying multiple investment properties. Lower barriers to entry in ETF investing mean you can start with smaller amounts and gradually build your portfolio, whereas property investments often require ongoing maintenance and management costs (as well as the initial deposit).
As ETFs provide diversification across multiple assets or sectors, the risk is lower compared to investing solely in one property or real estate market segment.
Types of ETFs to Consider
- Equity ETFs
Equity ETFs offer a broad range of shares in different sectors and geographic locations, allowing you to capture market growth while spreading risk across multiple companies.
- Bond ETFs
Bond ETFs are great for income generation and risk management, particularly in volatile market conditions. They offer exposure to various bond types, including government, corporate, and municipal bonds.
- Sector-specific ETFs
Sector-specific ETFs allow you to capitalise on specific market sectors that show potential for growth, such as technology, healthcare, or renewable energy.
- Commodity ETFs
Commodity ETFs provide exposure to the commodities market (physical items like precious metals or oil) without the worry of physical ownership, which is ideal if you are looking to hedge against inflation or diversify your portfolio further.
How to Choose ETFs Based on your Risk Tolerance and Investment Goals
It is important you consider your individual risk tolerance when choosing ETFs to supplement your property portfolio.
If you are more conservative you may lean towards bond ETFs for more stability, or if you are seeking higher returns you might consider equity ETFs with higher growth potential.
Tailor your ETF selection to meet your own goals such as retirement planning or capital growth by considering factors like dividend yield, growth prospects, and expense ratios.
Don’t underestimate the significance of expense ratios and liquidity in your ETF selection. Lower expense ratios reduce your costs, increasing your overall returns, while higher liquidity ensures ease of trading and reduced transaction costs.
By leveraging the diverse range of ETF options in Australia, you can strategically allocate assets across different ETF categories to achieve the best diversification to sit alongside your investment property portfolio.
ETF Risks
Investing in Exchange-Traded Funds (ETFs) offers numerous benefits, but it’s important to be aware of potential risks associated with these investments.
ETFs, like all market-traded securities, are susceptible to fluctuations in the market, which can impact the performance of the ETF and potentially lead to losses, especially in volatile market conditions.
Another important consideration is tracking error. Despite efforts to mirror the performance of their underlying indexes, ETFs may experience discrepancies that arise from factors such as fees, dividends, and market liquidity. These discrepancies can affect the ETF’s actual returns compared to the index it aims to track.
Some ETFs, particularly those tracking less liquid assets or niche markets, may have liquidity issues. This can impact you being able to buy or sell ETF shares at your desired price, meaning you might potentially pay higher transaction costs or have difficulty in making trades quickly. Make sure you do your due diligence and research before investing so you understand these risks.
You should understand the ETF’s structure, including its underlying assets, expense ratios, and tracking methodology, to ensure it aligns with your investment objectives. Evaluating an ETF’s historical performance and tracking error gives you a good idea of its consistency and reliability in replicating its index returns.
ETFs and Property Compliment Each Other Perfectly
Investing in Exchange-Traded Funds (ETFs) is an excellent strategy for diversifying investment property portfolios. ETFs have significant benefits, including diversification, cost-efficiency, and liquidity.
By providing exposure to a wide range of assets, sectors, and geographical regions, ETFs reduce portfolio risk compared to individual stock or property investments. Their typically lower expense ratios make them a cost-effective way to access diversified investment portfolios. ETFs trade on stock exchanges like individual stocks, offering liquidity and flexibility for you to buy or sell shares throughout market hours.
Integrating ETFs into an investment strategy alongside property can enhance your portfolio diversification across different asset classes, balancing your potential risks and returns.
By combining ETF investments with property, you can optimise your portfolio diversification, manage risk exposure, and capitalise on growth opportunities across diverse asset classes.
If you are looking to learn more about how ETFs can compliment your property portfolio then check out Owen Rask’s courses.
Or if you are wanting to add another asset class to your portfolio through residential or commercial property then chat to one of our investment brokers today!
