ETFs

Why ETFs?

Putting it simply, an ETF is just a collection of stocks that track a market index. By being proportionally averaged among many companies, the growth of ETFs is also slower than a stock that suddenly grows a lot.

These can really represent anything:

• Top 500 companies of USA
• Top 100 companies of London
• Asian market
• Europe Property Yield
• US Commodities
• anything you can imagine…

Unlike mutual funds which are actively managed by a group of people that try to time the market, ETFs follow a more passive direction beyond also having lower fees.

ETFs can be bought or sold just like stocks. They’re also a safer approach because there’s less volatility in the prices.

Accumulating vs Distributing

There are two types of ETFs: accumulating and distributing.

In the first, all the interest gained is being reinvested in the stock that you already hold.

On the other, you receive interest from the dividends in your account. This can also have some implications in the taxes you pay, as the dividends received by the ETFs tend to have to be reported depending on where you live.

How am I Diversifying my ETFs Portfolio?

My long-term strategy is to invest in ETFs that represent the global economy, but by choosing market indexes that have had good returns since their foundations.

I also only invest in Accumulating ETFs because of the way my country (Portugal) taxes incomes and also because of the compound interest accumulated in the reinvested dividends within the ETF.

If I opted to invest in Distributing ETFs, I would be taxed 28% per year of my dividends whereas, in Accumulating ETFs, I will only be taxed when I sell my shares. Since I am a long-term investor, I prefer to sell my shares and “create” my own dividends only when I’ll have a big enough portfolio to live off of it.

Depending on the country you live in and in your mindset, it may be better to invest in Distributing ETFs. It can also have a positive impact on the psychological side to see a passive income. In terms of taxes may also be a better choice as some countries don’t tax dividends (e.g. USA) until a certain value.

iShares Core MSCI EM IMI UCITS USD ETF Acc

This ETF represents the best companies in the emerging world markets (might be across all continents), i.e., markets that have potential in the future but are not yet considered so good as others.

iShares Core MSCI World UCITS USD ETF Acc

I also had to follow the markets an ETF that represent the best and more developed companies in the world.

In the future I might merge these 2 ETFs into only one: Vanguard FTSE All-World UCITS ETF (USD) Accumulating, which is basically 90% developed world and 10% emerging market.

Accumulating ETFs – My Old Strategy

The reason I gave up on this strategy is that I had a lot of duplicated ETFs that followed the same companies. And, as you can imagine, it doesn’t make sense to duplicate our exposure and risk.

iShares Core MSCI Europe UCITS EUR ETF Acc

This ETF reflects the best companies in Europe. As a European, I don’t mind supporting our companies, especially the ones with more reputation and with more potential to grow even further.

iShares DowJonesGlSustScreened UCITS USD ETF Acc

I’m also keen to invest in eco-friendly ETFs, such as this one. It follows the Dow Jones model but excluding companies and sectors which are harmful to the environment and that are not sustainable.

iShares S&P 500 EUR Hedged UCITS ETF Acc

This ETF tracks the largest US stocks from the S&P 500.

iShares InflationLinkedGovtBd UCITS ETF EUR Acc

This ETF tracks eurozone government inflation-linked bonds. Mainly from France, Germany, Italy and Spain.

By tracking this index, I’ve found a way to have my portfolio balanced and protected in periods when inflation is rising.

SPDR MSCI World Energy UCITS ETF Acc

This ETF tracks the energy sector of the developed markets worldwide.

SPDR MSCI World Health Care UCITS ETF Acc

This ETF tracks the health care sector of the developed markets worldwide.

SPDR MSCI World Technology UCITS ETF Acc

This ETF tracks the information technology sector of the developed markets worldwide.

Distributing ETFs – My Very Old Strategy

As already mentioned above, the only reason I don’t invest in Distributing ETFs is due to the way my country taxes these. Nonetheless, I still recommend them based on your situation.

iShares Asia Property Yield UCITS

The Asian market is a growing market since the 2008 crisis that affected all world. I also like to hold some shares of property yield to diversify my range of assets.

iShares Core FTSE 100 UCITS

This ETF represent the top 100 companies of London, something that definitely has potential in the long-term.

iShares MSCI Japan UCITS

In this ETF I’m tracking the best Japanese companies, a developed country from the Asian market that I am specially interested in.

iShares MSCI Korea UCITS

Another developed Asian country that I believe has a great potential.

iShares US Property Yield UCITS

Due to USA economic power and history, I also want to participate in its property yield investments.

Vanguard FTSE All-World UCITS

Represents some of the best companies in the developed world as well as some from the emerging market.

Vanguard S&P 500 UCITS

SP 500 is the most recognised market index in the world with a return on average of 11% per year, since 1920.

As you probably noticed, most of the previous ETFs are englobed in broader ETFs. A rule of thumb should be not to have duplicated indexes as we’re not really diversifying our portfolio.

Even though I think the previous ETFs are a good investment, always do your own due diligence according to your own situation. I changed my strategy 2 times, and I might do it more times, but always with the same core concepts in mind.

And please, don’t forget that past performance is no guarantee of future results!

Feel also free to share your ETFs with me in the comments section below and the reason why you added them to your portfolio.