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Bitcoin ETFs Approval Soon? Here’s How To Build an ETF Portfolio

Last Updated December 5, 2023 12:53 PM
Giuseppe Ciccomascolo
Last Updated December 5, 2023 12:53 PM

Key Takeaways

  • Experts believe the first spot Bitcoin ETF could be approved as early as 2024, or even before.
  • Investors are considering how to incorporate Bitcoin ETFs into their portfolios.
  • Investing in an ETF doesn’t mean you have to purchase and store the digital asset directly.
  • While Bitcoin ETFs offer a convenient way to access Bitcoin, it’s essential to maintain diversification within your overall portfolio.

The long-awaited approval of spot Bitcoin exchange-traded funds (ETFs) is on the horizon, with experts predicting that the first could be greenlit as early as 2024.

This marks a significant milestone for cryptocurrency investors, who have been eagerly awaiting a regulated way to gain exposure to Bitcoin without having to purchase and store the digital asset themselves.

In anticipation of this approval, many investors are already considering how to incorporate Bitcoin ETFs into their existing portfolios.

While there are a few different ways to do this, the most common approach is to allocate a small percentage of your portfolio to Bitcoin ETFs. Obviously, the exact amount you allocate will depend on your risk tolerance and investment goals.

What Are ETFs?

Exchange-traded funds (ETFs) are dynamic investment instruments that mirror the performance of an index or an asset class, offering a convenient gateway to diverse markets, ranging from worldwide shares to gold.

Much like the meteoric rise of Amazon and the enduring appeal of Radiohead, ETFs have experienced a surge in popularity since their inception in the 90s, with over 5,000 globally managing assets exceeding $5 trillion.

Setting them apart from traditional tracker funds, ETFs share similarities with stocks, contributing to their remarkable success. True to their name, ETFs are traded on exchanges, facilitating instantaneous buying or selling throughout the trading day – a departure from the typical restrictions imposed on many traditional funds, which can only be traded at day’s end.

In a nod to their stock-like nature, investors can engage in short selling, speculating on a price decline, or delve into options. They can also place bets on whether the ETF will trade above or below a specific price on a future date. Much like stocks, certain ETFs witness frenetic trading activity, changing hands thousands of times per second, while others see more measured transactions.

This distinctive blend of index tracking and stock-like features renders ETFs a versatile and accessible investment option in the contemporary financial landscape.

How Many Types Of ETFs Are There?

With a burgeoning selection of over 5,000 exchange-traded funds, their popularity continues to soar for several compelling reasons.

Beyond providing seamless access to a diverse array of investments, ETFs typically boast lower fees compared to traditional funds and eliminate the need for minimum investment amounts. The average ETF charges approximately 0.4%, translating to a mere $4 annual fee for a $1,000 investment, in stark contrast to the typical 0.7% fee levied by traditional index funds.

ETFs offer a versatile menu of options, allowing investors to track virtually any financial market imaginable, spanning Thai stocks and the U.S. dollar to platinum futures and German government bonds.

Specialized sector-focused ETFs, such as those centered on technology stocks or petcare providers, further enhance the breadth of choices available.

Types of ETF
How many types of ETFs are there?

In an analogy, if stocks were likened to individual music tracks, ETFs would be akin to curated Spotify playlists. Instead of selecting individual investments, investors can choose a thematic “playlist” and gain exposure to a diversified selection of assets.

While many ETFs adopt a passive approach, aiming to mimic market performance and keep fees low, there are innovative variations in the mix.

Inverse ETFs, for instance, appreciate in value when the tracked index declines, providing a hedge against market downturns. Leveraged ETFs amplify the movements of their underlying investments, delivering multiplied returns.

For instance, a 3x leveraged ETF would climb 6% if the S&P 500 rose 2%. The landscape also includes leveraged inverse ETFs for those seeking nuanced strategies.

How To Build An ETF Portfolio

Incorporating ETFs into your investment strategy offers flexibility. You can either integrate them into a broader investment mix or construct an entire portfolio solely comprised of ETFs. They facilitate the creation of a balanced portfolio, where potential losses in one investment may be offset by gains elsewhere.

Initiating your ETF investment journey amidst a vast selection of over 5,000 options requires some thoughtful selection. Keep in mind that the more ETFs you include, the higher the cost of adjusting your portfolio. Each trade in every ETF incurs a broker fee, a topic we’ll delve into in the next session.

Determining the number of ETFs you need depends on your objectives. A straightforward approach involves just two ETFs – one tracking global stock markets and another monitoring a broad measure of bonds.

This minimalist setup offers the advantage of simplicity. It makes it easy to monitor performance over time and rebalance between the two as needed.

For a more diversified approach, consider spreading your investment across a handful of ETFs. This could involve allocating funds to a general U.S. stocks ETF, one for major non-US stock markets, an emerging market stocks fund, and a few bond ETFs with varying risk levels. You can even explore ETFs tracking commodities like gold or oil.

Maintaining a keen eye on diversification is crucial; ensure that the holdings of your chosen ETFs don’t excessively overlap to maximize portfolio diversification. ETFs, being transparent, disclose their holdings daily, facilitating easy monitoring of their investment composition.

Above all, prioritize the consideration of fees. Understand the annual charges imposed by the ETF provider and be aware of the fees your broker will levy for buying and selling. This emphasis on fees ensures that your investment strategy remains cost-effective and aligned with your financial goals.

How To Buy ETFs

Acquiring your first ETF necessitates opening a brokerage account. This is an uncomplicated process with numerous online services available for buying, selling, and monitoring your ETFs, some even offering phone support.

When venturing into ETF trading, keep a vigilant eye on trading fees. For instance, if your broker charges a $10 commission per trade and you plan to invest only $100 monthly in an ETF, you risk losing 10% of your investment immediately. In such scenarios, consider pooling your funds for fewer, larger deposits or explore traditional tracker funds where trades are not individually charged.

While some brokerages, like Charles Schwab and Vanguard, manufacture their own ETFs, others focus solely on providing brokerage services. Certain brokerages even permit commission-free trading of their proprietary ETFs. Prominent ETF providers without direct brokerage services for consumers include Blackrock (iShares), ProShares , and State Street (SPDR) .

An alternative approach involves indirect ETF investment through robo-advisors-automated platforms. These platforms manage your money across multiple ETFs to align with your financial goals.

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