Want To Create A Custom ETF? Here Are 4 Steps To Set One Up

Exchange-traded funds, or ETFs, are one of the most popular ways to invest. They allow you to buy a basket of securities, such as stocks or bonds, through a single entity and can bring the benefits of a diversified portfolio in a single share.

But what if you want to choose your own stocks, bonds or funds to be held within a custom portfolio and have it managed as a single portfolio? This would create your own ETF-like portfolio and there are brokers that allow you to do just that. Here’s how to set up your own custom portfolio and a few places where you can do it.

(Spoiler alert: You can’t easily create your own ETF that trades — that requires regulatory approval and significant capital.)

1. Choose your strategy or theme

If you want to build your own custom portfolio, you probably have some ideas about the investment themes or strategies you’d like to utilize. Maybe you want to include stocks that you think are undervalued or that have high growth prospects. Others might have strong conviction behind themes such as artificial intelligence or clean energy.

One advantage of building a custom portfolio is that you don’t have to limit yourself to a single theme or strategy. Do some research and decide how you think you want your portfolio to be positioned. Then you’re ready to start building the fund.

2. Pick your securities for the portfolio

Once you have a strategy or theme picked out, you can choose the specific securities you want to include in your portfolio. You might include all individual stocks or bonds, but you can also combine asset classes or even use ETFs within your portfolio.

Say you want most of your stock exposure to come from an ETF that tracks the S&P 500, but you also want to own a handful of individual stocks in larger quantities. A custom portfolio allows you to do that, and you can position the fund to potentially outperform the broader market.

To be sure, attempting to beat the market is a tall task over the long-term. Even professional investors struggle to outperform the S&P 500 for long periods, so you should approach the challenge with a great deal of humility. Consider working with a financial advisor who can help you develop an overall strategy that you can stick with through good times and bad.

3. Choose how often you want to rebalance

One of the great features of a custom portfolio is that you don’t have to manage it yourself. Brokers who offer the service allow you to set target allocations for the securities within the portfolio and will rebalance back to those allocations at regular intervals.

Typically, you’ll want to rebalance the portfolio at least quarterly, but you may also want to do it more frequently if the allocations deviate from the target by more than 5 percent, for example. This will help ensure that your portfolio is invested the way you intended when you started and doesn’t tilt toward the investments that have gone up the most.

4. Monitor performance over time

Once you’ve set up your portfolio, you can monitor its performance over time the same way you would with any other investment fund you own. Keep in mind that if your portfolio is held in a taxable brokerage account, you’ll likely owe taxes on the gains and income the portfolio generates. If you set up the portfolio in a tax-advantaged account, such as a Roth IRA, you can avoid the tax consequences.

Brokers where you can build a custom portfolio

Fidelity

Fidelity Basket Portfolios allow you to select a portfolio of stocks and ETFs and manage it as a single investment. You can also select from pre-built portfolios that are developed by Fidelity’s experts. The service costs $4.99 per month, but you can start with a 30-day free trial if you want to test it out.

M1 Finance

M1 Finance lets you build your portfolio, or “pie,” and then decide how much you want to allocate to each slice. Once you pick your stocks or ETFs for your slices, you can set up your target weights and the portfolio will automatically rebalance to those allocations. There are no trading fees, and you can have as many “pies” as you’d like.

Other options

Other brokers, such as Charles Schwab and Interactive Brokers, allow you to trade fractional shares and build the portfolio you want, but don’t offer the same customization features of Fidelity and M1 that allow you to treat it as a single investment. If you work with a financial advisor, they may be able to use Interactive Brokers’ model portfolio feature that allows advisors to build custom portfolios.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.