investing

How to build your ETF portfolio: the two-ETF strategy

High Risk high gains is very often just high risk. My FIRE strategy exists from mainly buying two ETFs as you might have seen in my monthly portfolio updates. Its quite a boring strategy actually, you usually know what to buy, and even though you read in the newspaper what the next big stock could be, you still buy the same old tracker every month. Even worse both my trackers are accumulating, so no seeing my dividends increase every year!

But there is a fun part, if you are in the accumulating part following this boring, simple strategy will also make your portfolio, on average, grow faster then other strategies. Read further bellow why I feel this is.

For those who don’t know what ETF is, ETF stands for exchange traded fund, it is basically a tracker that just tracks a certain index. It is all computerized so stocks within this ETF change based purely on the tracker with no human interaction. It can track the SP500 index for example. You have two kinds of ETFs, distributing and accumulating. Distributing hands out dividends and are therefore usually more motivating to buy, as you can see your income steadily increase.

Two ETFs you can buy

SPDR MSCI WORLD UCITS ETF

This is an accumulating ETF that tracks the performance of large and mid-sized equities in developed markets globally. Development countries are generally considered safe havens for

When we look into the factsheet we can see what stocks SPDR MSCI WORLD UCITS ETF contains.

As you can see bigger companies take up a higher % of the index. Thats infact how ETFs work, they will never have the same % of every company in their portfolio, instead they will have a bigger % of the biggest company, and the smallest company will only have a very small share. Indirectly I am participating in Apple, Microsoft, Amazon, Facebook, Alphabet, Testa and johnson & Johnson.

And in this way purchasing SPDR MSCI WORLD UCITS ETF gives you stocks in a dozen of sectors and over 23 developed countries. While you might say some of these sectors grow much faster then others currently, like Information technology, it is still good to be spread out as you never know how the next crisis will affect a certain sector.

So great diversification! But what do I like most of all about SPDR MSCI WORLD UCITS ? Costs! With a mere 0.12%/year this is about 10-20 times cheaper then actively managed funds.

iShares Core MSCI Emerging Markets IMI UCITS ETF

As I second ETF I like iShares Core MSCI Emerging Markets IMI UCITS. iShares Core MSCI Emerging Markets IMI UCITS is also accumulating, it tracks not the developed market but the emerging markets. As you could see on the above graph (cumulative index performance) it has performed very similar to the MSCI WORLD index, although you could see its a lot more volatile.

As you can see its mainly China that is boosting the iShares Core MSCI Emerging Markets IMI UCITS ETF, but also big upcoming economies like India and Brazil. These merging markets are becoming more and more important in the world, and their steep rise cannot be overlooked, especially because China is predicted to be the world n2 economy by 2024. India will be the third and Brazil will hold the 8th spot.

As you can see the emerging Markets will hold almost half of the top 10 spots! Especially the jump into the pack of India is quite remarkable. They went from emerging market economy to a top player. Although you might still see a different imagine if you look at per capita since China and India both have high populations, but its still great progress for those countries.

You would be insane not to grab a very easy opportunity to be part of this market and making Shares Core MSCI Emerging Markets IMI UCITS ETF part of your portfolio. Of course these countries do not have the 200 year old Democracy that US and some European countries have. So the risk is higher, but the gains might be well worth it.

What else do I like about Shares Core MSCI Emerging Markets IMI UCITS ETF? Costs! With only 0.18% costs /year it is one of the cheapest ways to invest in the big emerging market economies.

Why accumulating ETFs?

Distributing ETFs give out dividends every quarter (or more/less depending of the ETF). Its quite motivating to see your dividends increase every year and build up a passive income stream that way. But when you are in the phase where you are still acquiring wealth you would only be re-investing this money again in stocks. That would lead to extra costs to purchase these stocks. Additionally some countries, such as my own (Belgium) are taxing dividend income. Where accumulating ETFs are only taxed at the very end when you sell them, at only around 1%, compared to a yearly 30% tax on the dividends.

That’s why your portfolio will grow faster when you buy accumulating ETFS.

There is one exception (at least in Belgium), that is if you buy dividend stocks. Then there is a tax free part of up to about 600 EUR of dividends. Not very high if you want to build a large diversified portfolio.

How to balance between them?

Right now its commonly accepted that a good balance is about 85% SPDR MSCI WORLD UCITS ETF / 15% iShares Core MSCI Emerging Markets IMI UCITS ETF, so the developed markets still play the biggest role.

A third ETF you might consider: iShares MSCI ACWI ETF

If you don’t wan to balance between SPDR MSCI WORLD UCITS and iShares Core MSCI Emerging Markets IMI UCITS then you might want to consider a third option: the MSCI ACWI tracker. This Index tracker tracks both the developed countries and the merging markets in one tracker. So you don’t need to worry about balancing between them. I am actually considering to add this tracker to my portfolio also as a third tracker. At the beginning its quite easy to balance yourself, but balance will become harder without selling ETFs.

The tracker is also accumulating, so that means lower costs and taxes.

As you can see the global coverage of iShares MSCI ACWI ETF is amazing, tracking a huge amount of countries worldwide, although it does include some rather questionable countries such as Argentina, but they don’t take up much or any space at all on the tracker since it only tracks the bigger companies.

When looking at the division US and US companies hold a very tight grip on the top. However if predictions come true China should start playing a bigger role here, I think it will be interesting to look at this tracker again in one year and see how the percentages moved.

Why did I not purchase iShares MSCI ACWI ETF yet?

While I firmly believe in the iShares MSCI ACWI ETF, there is one downside for this convenience and that is cost. The ETF costs about 0.32% yearly and that’s quite a lot higher then SPDR MSCI WORLD UCITS ETF (0.12%) and iShares Core MSCI Emerging Markets IMI UCITS ETF (0.18%). So about triple the SPDR MSCI WORLD UCITS ETF and that is withholding me from purchasing this ETF for now. But I wouldn’t be surprised if a cheaper alternative hits the market the coming years, so its for sure something to keep your eyes on.

What does iShares or SPRD stand for?

The trackers are actually just called MSCI ACWI, MSCI Emerging Markets and MSCI WORLD. There is different exchange traded fund families that offer different types of ETFs. They then put this in front of the tracker name. It does vote confidence when a tracker is from a famous fund family such as iShares or SPDR. iShares was created by BlackRock and SPDR (pronounced “Spider”) was created by Standard & Poor’s.

Another very famous one with some good tracker is Vanguard, if you live in the US then I would consider their SP500 index fund tracker which is low cost and is performing very well.

What about other ETFs?

I believe it would be wrong to say that this is the only possible strategy. Infact I believe there is a lot of great ETFs outthere, and for sure a few of them have outperformed the ones I mentioned. I just like the low cost, low taxes, geographical and sectorial spread they deliver. I do believe if you just buy one ETF and stick to that thats already a lot better then getting individual stocks. Just be aware that the more limited the ETFs are the more vulnerable you are in case of recession.

For example the Invesco Dynamic Leisure and Entertainment ETF tracks the Dynamic Leisure and Entertainment Intellidex Index and holds a small basket of 32 stocks. While it has performed outstanding before 2020, at the Corona epidemic this ETF suffered much much more then any other as it lost almost 70% of its value going from 52$ to 17$.

While now somewhat recovered at 38$ it does show that if you choose your ETF to limited in sector or region you expose yourself at a big risk.

But as I said it doesn’t mean there is no great other ETFs outthere. One I also really like is ETFs based on the SP500. I used to have one of these in my portfolio and it performed great and you can even find them with a costs of only 0.05% per annum! I only sold them because I felt I would be greater diversified with SPDR MSCI WORLD UCITS ETF, but everyone can see it has performed pretty amazing the last years and especially if you have US nationality you should consider making this part of your portfolio.

Is it now the right time to buy ETFs?

Well some would say you missed the big drop of the market in March, and then was the time to buy, and some would say the market is overheated and a recession year could be coming up in 2021.

Perhaps, the thing is these are all things people say every single year. Its just more spectacular to say we are expecting a crash then saying I am expecting a modest but steady rise over the next years. Just keep in mind you are buying for the long term, you need to expect not to sell what you buy for another 10 years at least, and at that point it doesn’t matter if the crash comes next year or in 5 years, because in the long run you will have a modest steady rise.

So I would say the time to buy is right now. Now while statistically its better to put everything you have in the market right now, it’s probably not so good in case another recession comes. While in the long run you will recover you might get demotivated quickly. That’s most people recommend to invest a steady amount every 1-2 months. If you have a large amount of cash on your bank then you could decide to invest a larger amount then you usually would every month spread over about 24 months for example. This way you give yourself the chance to gently get to know the world of stocks and avoid panic when the market drops the first months you invest.

How can you buy ETFs?

You can buy all these stocks with brokers. There is a ton of them globally, one famous one that I use is DEGIRO. DEGIRO sells both SPDR MSCI WORLD UCITS ETF and iShares Core MSCI Emerging Markets IMI UCITS ETF. DEGIRO has low costs, good support and great UI and user app. But there is more such as Keytrade bank, or even your local bank might sell them (although they usually have high costs attached to them).

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10 thoughts on “How to build your ETF portfolio: the two-ETF strategy

  1. Hi there!

    I liked reading your blog, especially this post about ETFs. Personally I have just started investing in ETFs and at the moment looking for the best portfolio for me. I agree with you on investing in ETFs from Ireland due to tax advantage. On the other hand, there are some US-domiciled ETFs like ARK ETFs, which have a really high gains. OK they are taxed at 20% and costs are high (0.75-0.79%) but overall you can earn much more even with these deductions. So what I’m planning to do now is to combine Ireland-based ETFs with those from ARK. What do you think?

    Greetings from Turkey,
    Volkan

    Like

  2. Hi Hakim,

    You cant really compare the ETF since SPRD MSCI WORLD UCITS ETF is only the developing countries.
    I do think an ACWI ETF is a good choice since you have even more spread.
    However the ETF you pointed out is in USD, unless you live in US I wouldn’t go for it. Additionally I think the costs of 0.4% is rather high for an ETF.

    Consider perhaps the one that I also got: ISHSV-MSCI ACWI UCITS ETF, you can purchase this on DEGIRO.

    Like

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