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How to Build a Simple ETF Portfolio for Growth & Income

July 25, 2019

Many investors want and need to have a portfolio that’s simple to build and maintain and which will provide a balance of growth and income over time. Exchange-traded funds (ETFs) provide an easy and less expensive means to do this, particularly if you are just beginning to build a portfolio.

Inside my Profitable Investing advisory, I have a collection of model portfolios that achieve my goal of all-weather performance with lots of income and risk-controlled growth using stocks, bonds and funds, including ETFs.

Stock Allocations

I’ll start with the indexed Vanguard High Dividend Yield ETF (VYM) for the general market with a dividend focus. VYM continues to do well with a return of 15.99% year to date.

This is the baseline for the stock market. But moving into the more attractive and defensive market sectors, real estate investment trusts (REITs) continue to gain from improving property values and rising income fueling increasing dividends. Use the Vanguard Real Estate ETF (VNQ) to get exposure to this area of the market. So far this year, it has returned 23.53%.

For utilities, which are also gaining from the security of essential services businesses, use the Vanguard Utilities ETF (VPU), which has turned in a year-to-date return of 14.75%.

Healthcare has traditionally been a reliable growth market through thick and thin. Use the Vanguard Health Care ETF (VHT) to buy into this sector. It has generated a return of 9.25% for the year to date.

The technology sector is being challenged by the US-China trade war, which may further impact supply chains in China as well as sales in China and Europe. But the innovation engines remain at full throttle, resulting in tech returns that dwarf the general stock market. Look to the Vanguard Information Technology ETF (VGT), with its year-to-date return of 34.66%, to play this trend.

The energy patch is also a major source of US economic growth. US petrol companies remain great sources of cash flows, and they’re also generating ample cash for bigger dividends. Check out the Energy Select Sector SPDR ETF (XLE), which has turned in a return of 12.59% year to date.

Stock Sector Performance Year to Date using Vanguard and SPDR ETFs—Source: Bloomberg Finance, L.P.

Fixed Income Allocations

On the other side of a balanced portfolio is fixed income. Given my view on the markets, fixed income allocations should have specific sector ETFs for corporate bonds, preferred stocks and municipal bonds.

The US economy continues to grow with little inflation. This is providing excellent opportunities for specific sectors of the bond markets. Add in a docile Federal Reserve, and it’s highly likely we’ll see easy monetary conditions for quite a while.

Corporate bonds are doing well. The healthy economy is bringing more revenues to companies that, in turn, makes them better credit risks. And with yields above Treasuries, they drive more demand for these bonds. To get in on this sector, use the SPDR Intermediate Term Corporate Bond ETF (SPIB), which has generated a return year to date of 7.46%.

Preferred stocks are the bonds of the stock market. They provide the certainty of largely fixed dividends that are paid first, before dividends to common stockholders. They are also defensive and bigger income-producing investments that are perfect for the current market. Here, look to the iShares Preferred & Income Securities ETF (PFF), which has generated a return year to date of 12.32%.

Municipal bonds have been on a roll for a while and remain a go-to market for improving prices with yields that continue to best US Treasuries. With the economy doing better, tax revenues for most state and local authorities are ever better, which drives up credibility and bond prices. My favorite muni bond choice is the Vanguard Tax-Exempt Bond ETF (VTEB), which has turned in a return year to date of 5.64%. That’s a taxable equivalent return of 8.68%.

Fixed Income Sector Performance Year to Date using Index Sector ETFs—Source: Bloomberg Finance, L.P.

All My Best,

Neil George

PS—Now that I’ve presented my favorite way to build a simple ETF portfolio for growth and income, check out my Profitable Investing advisory to see more of my market research and recommendations for safer growth and bigger reliable income.

And if you’d like to talk in person, I’ll be in San Francisco on August 15-17 at the MoneyShow investment conference where I’ll be presenting my economic and market analysis and my latest investment themes and recommendations. Click here for more information.