ETF Central Guide: How to Build Your First ETF Portfolio and Pick the Right ETF

Step 1: pick your asset classes

The first step in building an ETF portfolio is deciding how to allocate your investments among different asset classes. While I can't choose the exact allocation for you, I can share my thought process to help guide you.

As a young working professional investing for capital appreciation within a tax-advantaged account, I have a high-risk tolerance and a long investment horizon, aiming for retirement. Given these factors, I'm inclined to allocate the bulk of my portfolio to asset classes known for high growth potential—primarily equities.

Using the ETF Central screener, I start by selecting "Stocks" as the asset class. This action filters my options down to a manageable list of 2,616 ETFs, focusing my search on those most likely to meet my growth objectives.

Step 2: pick your geographical exposure

Next, it's essential to decide where geographically you want your stocks to come from. Personally, I'm a strong proponent of global diversification. This means I aim to hold stocks from a mix of U.S., developed, and emerging markets.

To align my portfolio with this strategy, I'll select "Global" in the ETF Central screener. This choice narrows my options down to 222 ETFs, making my selection process more manageable.

Step 3: refine your selection

This is the phase where you can truly tailor your portfolio to meet your specific investment goals by refining your selection of ETFs.

For equities, consider these primary asset class filters:

• Stock Type: Decide whether you want common stock or preferred shares.
• Size: Choose from small, mid, or large cap stocks. You may also opt for all cap or blended funds for broader exposure.
• Factor: These are essentially different styles of stocks. You might prefer ETFs that focus on low volatility, value, high quality, dividend yield, or multi-factor stocks.

Once you've narrowed down your equity type, you can apply additional filters for ETF characteristics:

• ESG: Environmental, Social, and Governance (ESG) considerations are increasingly important. Decide if you want your ETF to screen for ESG factors.
• Active or Passive: Choose between ETFs that passively track an index or those that are actively managed by professionals.
• Strategy: Determine if you want an ETF that holds long-only stocks, offers leveraged or inverse exposure, or generates options income.
• Provider: If you have a preference for certain ETF issuers, such as Vanguard, you can filter by provider.
• ETF Segment: Trackinsight and ETF Central categorize ETFs into various segments to help investors find key ETFs that match specific criteria.

For my own portfolio, I'm selecting "All Caps" and "Passive" management while leaving other filters unchecked. My goal is to find the broadest ETF in terms of diversification, managed in a simple, cost-effective manner as the core of my portfolio. This leaves me with 12 ETFs up for grabs.

Step 4: sort the remaining ETFs

Once you've narrowed down your selection to a dozen or so eligible ETFs, it's time to sort them according to various criteria to find the one that best fits your needs:

• Assets Under Management (AUM): This is useful if you're looking to quickly identify the largest ETFs. However, don't overlook smaller ETFs, as they can sometimes offer unique opportunities or niches.
• Best Performance: Sorting by recent performance can give you an idea of which ETFs have outperformed. Keep in mind, though, that past performance is not necessarily indicative of future results.
• Largest Inflows and Outflows: This metric is helpful for understanding which ETFs are currently popular with investors or which ones are being moved away from.
• Lowest Expense Ratio: If cost is a major consideration, sorting by expense ratio can help you find the most cost-effective ETFs.
• Indicated TTM Yield: For those interested in income, sorting by the trailing twelve-month dividend yield can be beneficial.

For my own portfolio, I'm going to sort by AUM and then by the lowest expense ratio. My objective is to find the largest and most cost-effective globally diversified, passive, index-based all-cap ETF. The winner? The Vanguard Total World Stock ETF

Step 5: compare against other ETFs

Once you've identified a potential ETF for your portfolio using the screener tool, you'll have the opportunity to conduct a more detailed comparison against possible substitutes. Clicking on the ETF in the list will direct you to a comparison tool.

On this page, you can analyze key differences between the ETFs, including historical performance, volatility, liquidity, fees, yield, assets under management (AUM), the underlying index, top holdings, and sector allocations. This comprehensive view provides everything you need to make an informed decision.

For those interested in a deeper dive into how the ETF comparison tool works, I recommend checking out my previous analysis, where I compared the Vanguard Dividend Appreciation ETF versus the Vanguard High Dividend Yield ETF.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.