How to Build a Low-Cost Portfolio Using ETFs

Investing doesn’t have to be expensive. Exchange-Traded Funds (ETFs) offer a low-cost, diversified, and flexible way to build a strong investment portfolio. Whether you’re a beginner or an experienced investor, ETFs allow you to create a balanced portfolio without the high fees often associated with traditional mutual funds or actively managed investments. 

This guide will cover: 

• Why ETFs are ideal for a low-cost portfolio 

• Key factors to consider when selecting ETFs 

• A step-by-step approach to building a low-cost ETF portfolio 

• Sample ETF portfolio models 

  
  

By the end of this article, you’ll understand how to construct an efficient and cost-effective investment strategy using ETFs. 

Note: The examples mentioned in this article are provided for educational purposes only. There are many other examples and funds that can be considered, and any fees mentioned were accurate at the time of publication but may change over time. 

Why Use ETFs for a Low-Cost Portfolio? 

ETFs have become a popular choice for cost-conscious investors due to their many advantages, including: 

1. Low Expense Ratios 

Most ETFs have expense ratios below 0.50%, with some as low as 0.03%. In contrast, actively managed mutual funds can charge 1% or more in fees, which can reduce your long-term returns. 

2. Instant Diversification 

A single ETF can hold hundreds or even thousands of stocks or bonds. This allows you to diversify across sectors, countries, and asset classes without needing to pick individual stocks. 

3. Tax Efficiency 

ETFs have a unique structure that minimizes capital gains taxes compared to mutual funds. Many ETFs use in-kind transactions, which help reduce taxable events for investors. 

4. Flexibility and Liquidity 

ETFs trade on exchanges like stocks, meaning you can buy and sell shares throughout the trading day. This is in contrast to mutual funds, which are only priced at the end of the day. 

5. Transparency 

Most ETFs disclose their holdings daily, so you always know what assets you are invested in. 

Key Factors to Consider When Selecting ETFs 

When choosing ETFs for your low-cost portfolio, consider the following factors: 

1. Expense Ratio 

Lower is better—ETFs with expense ratios below 0.10% are ideal for cost-conscious investors. 

Example: Vanguard Total Stock Market ETF (VTI) has an expense ratio of just 0.03%. 

2. Liquidity and Trading Volume 

Look for ETFs with high trading volume to ensure ease of buying and selling. Higher liquidity generally means tighter bid-ask spreads, reducing trading costs. 

3. Diversification 

Choose ETFs that cover broad market indices or specific sectors to spread risk. 

Example: An S&P 500 ETF provides exposure to 500 leading U.S. companies. 

4. Tracking Error 

The best ETFs closely follow their benchmark index with minimal deviation, ensuring that your returns align with market performance. 

5. Tax Efficiency 

ETFs structured as index funds typically generate fewer taxable events than actively managed funds, which can help maximize your net returns over time. 

Step-by-Step Guide to Building a Low-Cost ETF Portfolio 

Step 1: Define Your Investment Goals 

• Determine whether you are investing for long-term growth, income, or capital preservation. 

• Assess your risk tolerance; for example, a younger investor may focus more on stocks, while retirees might prefer a mix of stocks and bonds. 

  
  

Step 2: Choose a Core Portfolio Strategy 

A core-satellite approach is a cost-effective way to construct a portfolio: 

• Core ETFs: Use broad market ETFs covering stocks and bonds for stability and diversification. 

• Satellite ETFs: Add sector-specific or thematic ETFs to target areas where you see potential for higher returns. 

  
  

Step 3: Select Your ETFs 

Below are sample portfolio models based on different risk tolerances and investment objectives: 

1. Conservative Low-Cost ETF Portfolio (Lower Risk, More Stability) 

• 60% Bonds: Vanguard Total Bond Market ETF (BND) – Expense ratio: 0.03% 

• 30% Large-Cap Stocks: Vanguard S&P 500 ETF (VOO) – Expense ratio: 0.03% 

• 10% International Stocks: iShares MSCI EAFE ETF (EFA) – Expense ratio: 0.32% 

Best for: Investors nearing retirement or those who prioritize capital preservation. 

2. Balanced Low-Cost ETF Portfolio (Moderate Risk, Growth & Stability) 

• 40% U.S. Stocks: Vanguard Total Stock Market ETF (VTI) – Expense ratio: 0.03% 

• 30% Bonds: iShares Core U.S. Aggregate Bond ETF (AGG) – Expense ratio: 0.04% 

• 20% International Stocks: Vanguard FTSE All-World ex-US ETF (VEU) – Expense ratio: 0.07% 

• 10% Real Estate: Schwab U.S. REIT ETF (SCHH) – Expense ratio: 0.07% 

Best for: Investors looking for a balance between growth and income. 

3. Aggressive Low-Cost ETF Portfolio (Higher Risk, High Growth Potential) 

• 50% U.S. Stocks: iShares Russell 1000 Growth ETF (IWF) – Expense ratio: 0.19% 

• 30% International Stocks: iShares MSCI Emerging Markets ETF (EEM) – Expense ratio: 0.68% 

• 10% Small-Cap Stocks: Vanguard Small-Cap ETF (VB) – Expense ratio: 0.05% 

• 10% Technology: Technology Select Sector SPDR Fund (XLK) – Expense ratio: 0.10% 

Best for: Younger investors with a long investment horizon and higher risk tolerance. 

Step 4: Automate and Rebalance Your Portfolio 

1. Use Dollar-Cost Averaging (DCA) 

Invest regularly (monthly or quarterly) rather than trying to time the market. This strategy reduces the impact of market volatility. 

2. Rebalance Periodically 

Review your portfolio every 6-12 months to ensure your allocation matches your goals. For example, if stocks have grown faster than bonds, you may need to sell some stocks and buy more bonds to maintain your target allocation. 

3. Use Tax-Advantaged Accounts 

Investing through 401(k)s or IRAs can help reduce tax liabilities while maximizing returns over time. Consider strategies like tax-loss harvesting to further minimize capital gains taxes in taxable accounts. 

Final Thoughts: Why ETFs Are the Best Low-Cost Investment Strategy 

ETFs provide a cost-effective, diversified, and flexible way to invest, making them ideal for both beginners and experienced investors. By focusing on low-cost, broad-market ETFs, you can create a portfolio that maximizes returns while minimizing fees. Remember that the examples and fee details mentioned in this guide are provided for educational purposes only and were accurate at the time of publication. There are many other options available, and fees may change over time. 

Key Takeaways 

• ETFs offer instant diversification across multiple assets. 

• Low expense ratios and tax efficiency make ETFs attractive for cost-conscious investors. 

• A core-satellite approach can help you build a balanced portfolio. 

• Dollar-cost averaging and periodic rebalancing are essential for long-term success. 

• Investing in tax-efficient accounts can further enhance your returns. 

Want to Learn More? 

Check out: 

• Best ETFs for 2024: Top Picks for Growth and Stability 

• Index Funds vs. ETFs: Which Is Better for Investors? 

• How to Build a Diversified Investment Portfolio 

  
  

Start building your low-cost ETF portfolio today and take control of your financial future!