Exchange-Traded Funds (ETFs) have revolutionized investing by offering diversified exposure in a single transaction. While creating an actual ETF involves complex regulatory processes, individual investors can mimic this concept by building a custom ETF-like portfolio using fractional shares. This article explores how you can use fractional shares to create a diversified investment portfolio resembling an ETF.
Understanding Fractional Shares: The Building Blocks of Your Custom ETF
Fractional shares allow investors to own a portion of a share, making it possible to invest in high-priced stocks with a smaller amount of money. Platforms like Robinhood, M1 Finance, Fidelity, Betterment, and Square’s Cash App enable the purchase of these fractional shares, democratizing access to expensive stocks.
Creating a Custom ETF-like Portfolio
- Select Your Stocks: Choose a mix of companies you want to invest in, similar to how stocks are selected for an ETF. For example, you might pick a combination of tech giants like Amazon and Google, and other industries like MGM Hotels.
- Invest Regularly: Utilize a strategy like dollar-cost averaging, where you invest a fixed amount (e.g., $50) in each chosen stock every month, regardless of the share price. This method helps in buying shares at both high and low prices, averaging out the cost over time.
- Diversify Your Portfolio: Mimic the diversification of an ETF by selecting stocks across various sectors and industries. You can also draw inspiration from famous investors’ portfolios available on platforms like Finbox.
- Reinvest Dividends: If your platform supports dividend reinvestment plans (DRIP), use this feature to reinvest dividends back into buying fractional shares, enhancing the compounding effect.
Benefits of a Fractional Share Portfolio
- Accessibility: Invest in high-priced stocks like Tesla with a smaller capital outlay.
- Diversification: Spread your investment across different stocks, reducing risk.
- Flexibility: Adjust your portfolio easily, adding or removing stocks as needed.
- Control: Unlike an ETF, you have complete control over the stocks in your portfolio.
Conclusion
While it’s not possible for individual investors to create an actual ETF, using fractional shares to build a diversified portfolio offers a similar experience. This approach allows investors to tailor their investments according to their preferences and goals, leveraging the benefits of an ETF-like structure with added control and flexibility.
