How To Build a Multi-Asset Portfolio Using ETFs

It’s best to expect the unexpected when it comes to the markets, so building an investment portfolio is more about preparing for a range of outcomes than choosing the right assets.

Investors use historical and fundamental data to understand how different assets have performed in different market environments, but that doesn’t eliminate uncertainty. In 2022, for example, when stocks fell, bonds fell with them–a highly unusual situation.

Instead of trying to predict what comes next, portfolio construction increasingly focuses on preparing by combining assets that respond differently to changing conditions.

A multi-asset portfolio built with exchange-traded funds (ETFs) offers a practical way to do that.

Define the Goal and Build for Multiple Outcomes

Before choosing any ETFs, it helps to define what you’re saving for, whether that’s building a retirement fund or targeting a major purchase. You must also know your tolerance for risk. 

“Goals will guide you to what is appropriate or what the answer is for you specifically,” said Daniel Milan, investment advisor representative and managing partner at Cornerstone Financial Services in Southfield, Mich. 

Once you have those goals set, then you can work backward to build your portfolio, he added.

Savvy investors use their goals to build portfolios that can adapt to different economic conditions, be it growth, contraction, or inflation. Different types of assets move in different directions depending on the market environment. 

That variability makes diversification necessary. This is why building for multiple outcomes matters more than trying to predict a single one.

Start With a Core Growth Allocation

Equities typically form the foundation of a multi-asset portfolio because they are the primary driver of long-term growth. That growth isn’t evenly distributed across markets or regions. Different sectors, geographies, and company sizes can perform differently depending on a range of economic conditions, which is why diversification within equities matters.

A core allocation typically includes exposure across regions and market segments, often through ETFs, such as:

• U.S. large-, mid-, and small-cap stocks
• International developed market stocks from countries like Canada and Japan
• Emerging market stocks from Asia, Latin America, and Eastern Europe

Global diversification can help reduce reliance on any single economy while introducing exposure to different growth cycles and currencies. Broad diversification across regions and asset types can help manage risk over time, according to Morningstar research.

Add Defensive Assets

Equities provide the growth engine of the portfolio, but they don’t provide stability on their own. To help manage risk, portfolios typically include defensive assets such as bonds and Treasuries that provide income and reduce overall volatility.

Bonds have historically served as a counterbalance to equities during market downturns. However, that relationship isn’t guaranteed.

“That correlation ebbs and flows,” said Matt Gentzkow, investment strategist at Waddell & Associates, a Tennessee-based wealth management firm overseeing about $2 billion in client assets. In 2022, for example, both asset classes declined as interest rates rose, challenging traditional diversification strategies.

There are various types of bonds, from Treasuries to corporates to municipals. Credit quality, maturity, and interest-rate sensitivity also impact how they perform and what they yield. Bond exposure often needs to be tailored, as reflected in portfolio construction frameworks from Vanguard.

Include Inflation Protection

Inflation can reduce real returns over time, which is why some portfolios include assets designed to respond more directly to rising prices.

If inflation is a significant concern, Milan said investors may want to consider Treasury Inflation-Protected Securities. TIPS adjust with inflation and can help preserve purchasing power within a fixed-income allocation. Commodities and real assets, such as real estate, energy, or infrastructure, can also perform well during inflationary periods. 

These exposures may be included directly or through sector-based equity ETFs, depending on how the portfolio is structured.

Layer in Diversifiers

For a truly diversified portfolio, “you’ve got to have assets that are not correlated” to stocks and bonds, Gentzkow said.

Diversifiers are assets that behave differently from traditional stocks and bonds, helping reduce portfolio correlation. These include managed futures, gold and precious metals holdings, and other alternative investments, all of which can be held through ETFs.

Low-correlation assets can provide support when stocks and bonds struggle, which can occur when historical correlations break down, as noted by research from firms like AQR.

For many investors, exposure to these assets is optional, but they can add another layer of balance to a portfolio.

Think in Terms of Roles, Not Percentages

Rather than focusing on precise allocations, it can be more useful to think about what each part of your portfolio is meant to do. Equities drive growth. Bonds provide stability. Inflation-sensitive assets help protect purchasing power. Diversifiers aim to reduce correlation.

This role-based framework aligns with portfolio construction principles used by investment firms such as BlackRock, which emphasize combining assets with different behaviors to avoid what it describes as a “diversification mirage,” where holdings appear diversified but move in the same direction.

Gentzkow compares a portfolio to the construction of a home: “Stocks are the foundation. Bonds are more like your walls and the roof, so it sort of protects everything potentially,” he said.

The focus stays on how the pieces work together, rather than how any single part performs on its own.

Implement With ETFs

One of the main advantages of ETFs is how easily they allow investors to build and adjust a multi-asset portfolio. 

They provide exposure to various assets across the market, often at a relatively low cost, and can be traded throughout the day like individual stocks. Institutional investors have long used ETFs as building blocks for portfolio construction.

As Milan put it, “ETFs are an opportunity to have a basket of investments without the stress of managing multiple investments.”

A typical ETF-based portfolio might include:

• Broad equity ETFs for core growth
• Bond ETFs for income and stability
• Commodity or alternative ETFs for diversification

For most investors, liquidity and cost are key considerations. Milan recommends focusing on “low-cost, passive, non-active, managed, high liquidity ETFs,” pointing to providers such as Vanguard, iShares, and SPDR.

The goal is not to select individual securities, but to combine asset classes efficiently.

Rebalance and Reassess

Over time, market movements can shift a portfolio away from its original structure. Rebalancing involves adjusting holdings to bring the portfolio back in line with your goals. This often means selling assets that have performed well and buying more of those that have lagged.

“There’s a lot of research behind [that strategy] that mathematically adds to portfolio return over time,” Gentzkow said.

Some investors rebalance quarterly, while others do so less frequently to allow trends to play out. The key is to stay aligned with long-term goals rather than reacting to short-term market changes.

The Bottom Line

A multi-asset portfolio isn’t built to predict what markets will do next. It’s built to hold up across a range of outcomes.

By combining equities, bonds, inflation-sensitive assets, and diversifiers, investors can create a framework that responds to different economic conditions. ETFs make that process more accessible by offering exposure to a wide range of asset classes.

There is no single “correct” allocation, but focusing on how each component contributes to the overall portfolio can help create a more balanced and durable approach to investing.