Practical Guide: Investing in ETFs and Building a Profitable Portfolio

Managed investment funds (ETF) have become the preferred choice for those seeking profits without dedicating hours to market analysis. Unlike active trading with cryptocurrencies or individual stocks, investing in ETFs allows for sustained capital growth with less stress and controlled risk.

How ETFs operate: the mechanism behind profitability

An ETF functions as an investment vehicle that pools capital across multiple assets simultaneously. Let’s take a concrete example: if you invest $100 in a technology innovation-focused ETF, that money is automatically distributed among 20 or 30 leading companies in the sector. With a single transaction, your capital is diversified across companies like Nvidia, Microsoft, or Alphabet.

The true value of an ETF lies in its automatic management. The specialists managing the fund constantly monitor the performance of each asset. If a company in the portfolio begins to lose value, it is replaced by a more promising one. This means your investments stay in companies with the best outlook, without you having to monitor them daily.

Return versus risk: demystifying the equation

The risk of an ETF is significantly lower compared to leveraged operations, futures, or CFDs. This is the main reason why conservative investors choose these instruments. Although technically possible to operate ETFs with leverage — amplifying both gains and losses — most investors use them precisely to avoid extreme volatility.

The returns of an ETF far surpass those of a traditional bank account but do not reach the potential gains of swing trading or margin trading. It’s a deliberate balance: moderate security in exchange for above-average profitability.

Why choose ETFs? Advantages and limitations

Advantages

• Passive and automatic portfolio management
• Professional asset management
• Proven long-term returns
• Ideal tool for beginners
• Less constant supervision needed

Disadvantages

• Lower returns than margin trading
• Not all ETFs are equally efficient in management
• Exposure to overall market fluctuations

ETF classification: markets and specialties

ETFs are mainly segmented in two ways:

By market type: ETFs operate in stock markets, foreign exchange, commodities, and cryptocurrencies. Each market has unique characteristics of volatility and performance potential reflected in their respective funds.

By asset specialization: Within stock markets, for example, there are ETFs dedicated to specific sectors (technology, energy, finance), or specific national exchanges (New York, Tokyo, Shanghai), or benchmark indices like the S&P 500 or Nikkei 225.

Essential criteria for selecting your ETF

Not all ETFs are suitable for every investor. Selection depends on your goals, risk tolerance, and market intuition. These factors are decisive:

1. First, identify the market that appeals to you

Forex ETFs offer modest but safe benefits. Cryptocurrency ETFs promise higher gains, although the risk of losses also increases proportionally. Stock and commodity ETFs occupy an intermediate position: reasonable stability with consistent fundamental analysis.

2. Analyze specific assets within each ETF

Consider particular sectors: during the pandemic, aerospace sector ETFs suffered severe declines, while technology ETFs experienced significant rises. However, tech ETFs also face vulnerabilities, such as dependence on microchip production—a sector with little diversification that can impact the entire sector if disruptions occur.

For ETFs focused on specific stock exchanges, it’s crucial to monitor geopolitical and economic factors. When Russia invaded Ukraine, Russian stock ETFs collapsed amid sanctions forecasts. A technical chart never predicts armed conflict or economic policy changes; it only reflects them after the fact.

3. Incorporate technical analysis into your evaluation

Although technical analysis cannot predict external events, it is a valuable tool for assessing the profitability potential of any financial instrument. Professional traders examine oscillators and moving averages to determine short- and medium-term performance. These indicators guide major investors’ decisions and can signal the optimal moment to enter or exit an ETF position, always considering the global context.

Steps to start investing in ETFs

Step 1: Open an account on an investment platform
Choose a broker that offers access to ETFs with competitive commissions.

Step 2: Complete identity verification
Provide your email and create a secure password.

Step 3: Deposit funds
Select your preferred payment method (bank card, transfer, e-wallet) and load the capital you want to invest.

Step 4: Research and select your ETFs
Explore available options, analyze their composition and historical performance.

Step 5: Make your first investment
Once you’ve identified your ETF, open a buy position and enter the amount to invest. From this moment, the ETF will start generating returns based on its stock market performance.

Recommended ETFs for 2023

Choosing the best ETF entirely depends on your personal analysis. However, these funds stand out as solid starting points:

ARK Autonomous Tech & Robotics ETF (ARKQ)
Focuses on companies in automation, robotics, and artificial intelligence. The recent surge in AI is driving this ETF upward with companies like Nvidia, Trimble, and Iridium Communications.

Invesco Solar ETF (TAN)
Focused on renewable energy, solar panel manufacturing, and related technologies. Major components include SolarEdge, First Solar, and Enphase Energy.

Vanguard Information Technology ETF (VGT)
A defensive and reliable ETF betting on tech giants. With Microsoft, Google (Alphabet), and Amazon in its top holdings, it offers exposure to eight of the ten most valuable companies in the world.

Global X Fintech ETF
An alternative to other fintech funds, with less exposure to cryptocurrencies and more emphasis on digital payment processors like PayPal and Square, along with veterans like Visa and Mastercard.

Amplify Lithium & Battery Technology ETF
Specialized in lithium extraction, lithium-ion battery production, and related technologies. Albemarle, Panasonic, and Tesla are key players in this fund, highly sensitive to the evolution of the global electric vehicle market.

Diversification: the key to maximizing your return

The ETFs mentioned are just a fraction of the available options. The fundamental practice is not to concentrate your investment in a single ETF but to build a diversified portfolio that reduces exposure to a specific sector or market.

Combining investments across multiple ETFs, individual stocks, commodities, and other assets provides greater resilience against market changes. History offers clear lessons: when air travel collapsed during the pandemic, technology surged. These market shifts create opportunities to optimize your capital if you stay alert to global economic changes.

Maintain constant vigilance on the macroeconomic context, adjust your portfolio accordingly, and remember that patience combined with informed analysis yields the best long-term results when investing in ETFs.