There are two sensible ways to build an ETF portfolio.
The first is to use a diversified ETF such as VDAL or DHHF. The second is to construct your own portfolio using several ETFs.
Both can work. The right choice depends on two things: how much money you are investing, and whether you have the knowledge, temperament, and discipline to build a portfolio properly and then leave it alone.
For smaller balances, or for investors who value simplicity above all else, a diversified ETF can be perfectly adequate. But once the amount invested becomes meaningful, and if you have the skill to do it well, constructing your own ETF portfolio can produce a better outcome because you gain more control over quality, valuation, diversification, and tax efficiency. That is the real point. Portfolio construction is not about being clever. It is about improving the odds.
A simple diversified ETF is often the right starting point
I want to be clear on this point, because too many investors make a simple job complicated.
If your portfolio is still relatively small, or you know you are prone to tinkering, a diversified ETF has a lot going for it. It is simple, low maintenance and behaviourally robust. That matters. The best portfolio on paper is worthless if you cannot stick with it. A simple, rules-based, low-cost strategy that you hold for decades will usually beat a more sophisticated portfolio that you keep changing every time markets move.
This blog is not an argument against diversified ETFs. It is an argument for recognising their limits.
Why we prefer to build the ETF portfolio ourselves
The weakness with diversified funds is that they typically lock investors into a relatively static asset allocation across geographical markets, regardless of how attractive or unattractive those markets may be from a valuation perspective. In other words, they tend to allocate capital based on a predetermined formula rather than where future returns are likely to be most compelling.
Diversified ETFs may be fine if you want pure convenience. But it becomes less attractive when parts of the portfolio are not especially compelling. Campbell’s recent blog on Australian versus international shares makes this point well. The standard approach taken by these diversified ETFs of allocating 35-37% into Australian shares does not automatically add up, and he argued investors should think much more critically about where and how new money is invested. He is not necessarily arguing for permanently abandoning Australia. He is arguing against blindly accepting a default split when the valuation case is not there.
The second limitation is that they usually rely on traditional market-cap indexing, which is simple and low cost, but not necessarily the most effective indexing methodology. As I have previously explained, alternative rules-based share index strategies can improve portfolio construction by addressing some of the shortcomings of pure market-cap weighting.
That is one of the key advantages of constructing the portfolio yourself. You can remain diversified and disciplined, but you are no longer forced to allocate large amounts of capital to markets, sectors or styles that do not look attractive.
Step 1: Start with quality – must pass the “Forever Test”
The first step in constructing an ETF portfolio is not to ask, “What is cheap?” It is to ask, “What would I be happy to own forever?”
That is the essence of what I call the Forever Test. The job is not to pick what will do well this year. The job is to choose the index most likely to deliver a strong average return over the next 20 to 30 years and ideally longer. You win by reducing friction and by keeping costs low and avoiding unnecessary tax drag, holding the investment for the long term.
This is why I do not like thematic indexing as a core portfolio tool. A narrow theme might perform well for a period, but that is not the same thing as being worthy of a permanent allocation. A core ETF portfolio should be built on broad, fundamentally sound, rules-based index methodologies that you would still be comfortable owning after a bad year, a bad five years, or a decade in which nothing exciting seems to happen.
Quality first. Then price. That order matters.
Step 2: Then focus on price, not stories
Once an index passes the quality test, the next question is valuation.
Your long-term return comes down to three things: the quality of the asset, the price you pay, and how long you hold it. You cannot control the future, but you can insist on quality, refuse to overpay, and give compounding enough time to work. That is what value-aware asset allocation is trying to do.
This is also where most investors go wrong. They chase what has just done well. They buy the story after the repricing has already happened. They tell themselves that what they own matters more than the price they pay. It does not. Price paid is one of the dominant drivers of future return. If you overpay, you are relying on organic growth alone to bail you out. If you buy a quality index when it is cheap or at least reasonably priced, you improve the odds that future returns will be acceptable and often better than average.
From a practical perspective, this is not hard to assess. Most ETF providers publish fact sheets and index methodology documents. Those usually give you current or forward PE ratios, sector exposures, geographic exposures and other useful valuation or portfolio metrics. That information is useful. A proper ETF portfolio should not be built off labels alone.
Understand returns come from 3 sources
Investors often think about ETF selection in a superficial way. They compare fees, maybe glance at historical returns, and stop there.
But your return really comes from three sources.
The first is income. The second is organic growth in underlying earnings. The third is repricing, where an index moves from cheap to fair, or sometimes from fair to expensive. A value-aware ETF construction approach is simply a way of trying to maximise return from all three sources rather than relying on only one.
If you buy an expensive index, you are usually giving up the repricing component. In some cases, you may even be setting yourself up for negative repricing. If you buy a quality index at an attractive valuation, you give yourself a better chance of receiving income, participating in long-term earnings growth, and benefiting from mean reversion in valuation. That is a much stronger setup.
The four ways to tilt a portfolio
Once you understand quality and price, there are usually four broad ways to build the portfolio.
The first is by geography within developed markets. This is not about making heroic country bets. It is about being willing to direct more capital to developed markets that appear more attractively priced, while staying broadly diversified. A share market is not the same thing as the domestic economy. Listed companies can earn large portions of their revenue globally, so country exposure should be thought about more carefully than most investors do.
The second is index methodology. Traditional market-cap indexing is fine, but it is not the only game in town. There are also alternative rules-based approaches, including quality and other factor-driven methods. It is often valuable to use several low-cost, rules-based, evidence-backed indexing strategies rather than relying on one methodology alone.
The third is company size. Sometimes smaller or mid-cap companies are priced more attractively than large caps. That does not mean small caps should dominate the portfolio. It means size can be a useful filter when looking for better value.
The fourth is emerging markets. Emerging markets are more volatile, and that tends to scare people into token allocations. I think the more important consideration is not whether the allocation is 5% or 8% or 12%. The more important question is relative value. I would rather own a cheap emerging market index than an expensive developed market index, provided the overall portfolio remains diversified and behaviourally manageable.
A practical way to structure the portfolio
So how do we think about constructing an ETF portfolio?
We start with the asset allocation we are comfortable with and the amount of volatility we can tolerate. Then, within that structure, we choose broad, high-quality index exposures that pass the Forever Test. After that, we direct money to the areas that look most attractive from a valuation perspective.
That may mean underweighting parts of the market that look stretched. It may mean using a mix of global developed market ETFs, alternative rules-based index methodologies, some small-cap exposure, and a meaningful allocation to emerging markets when value justifies it. It also means not allowing any one country, sector, or story to dominate the portfolio.
This is the real advantage of constructing the portfolio yourself. You are still using ETFs. You are still staying diversified. You are still keeping the process rules based. But you are not surrendering all portfolio construction decisions to a one-ticket product that may be forced to own too much of what you currently like least.
That is not complexity for complexity’s sake. It is simply value-aware asset allocation applied properly.
Time is the edge most investors waste
The final step is the one that sounds easy and is hardest in practice: hold the portfolio.
Time is the most powerful wealth-building input because it magnifies everything else. Reasonable returns accumulated over long periods exceed high returns generated sporadically. The problem is that compounding is deceptive. In the early years it feels like nothing is happening. That is why investors keep interrupting it. They chase last year’s winner, react to short-term volatility, or abandon a well-designed strategy before it has had time to work.
The solution is not more activity. It is better process.
Buy a quality index. Make sure the price is sensible. Keep fees and tax drag under control. Reinvest. Add regularly. Rebalance mainly with new money. Then hold the portfolio for decades, not quarters. Long-term wealth is not built through isolated wins. It is built through consistent, repeatable behaviours applied over a very long time.
Final thought
If you want convenience, a diversified ETF is a perfectly reasonable solution.
If you want more control, and the amount invested is large enough for portfolio construction to matter, then building your own ETF portfolio can be superior.
But only if you do it properly.
The framework is simple. Choose quality first. Then consider price. Use a rules-based methodology. Stay diversified. Keep friction low. And once you have built the portfolio, give it the one thing most investors never give it enough of: time.
