It has been a while since we looked at portfolio construction just using ETFs or mostly ETFs anyway. This is actually one of my favorite forms of ETF analysis, blending together different funds to achieve build a portfolio that hopefully delivers proper diversification and a useful risk adjusted result.

The context here is using more narrow based funds which is closer to my portfolio management background which combines narrow ETFs and individual stocks.

There is still a lot of work to do in assembling all-ETF portfolios. Without carefully looking through to a fund’s holdings it would be easy to end up unintentionally overweight or underweight a sector, an industry, an individual stock even a risk factor like interest rate sensitivity.

I read an article the other day about using single country ETFs to build a portfolio. I am a big believer using country funds but many of them do not track broad based indexes or more correctly these foreign markets’ benchmark indexes are not necessarily broad based. One great example of this is Singapore. The MSCI Singapore Index has more than 35% in financials and another 20% in real estate stocks. Not long ago financials and real estate were the same sector. No matter how you look at buying a Singapore ETF exposes you to a lot of financial sector exposure. That doesn’t have to be a negative but you should probably understand the position you’re taking at the sector level, take a little time to understand the backdrop in Singapore for financial companies and take the time understand the business for any particularly large holdings. One Singapore ETF I looked at (using specific symbols is tricky for compliance reasons) and three different banks each with low double-digit weightings.

Another example of lopsided weighting is Denmark, the MSCI index tracking that country has almost 40% in healthcare. It would be pretty difficult for an ETF tracking Denmark to do much with healthcare going along for the ride. Yet another example would be Taiwan with almost 60% in tech.