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.
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.