Investing in the stock market can feel overwhelming, especially when faced with the daunting question: Which stocks should I buy? Enter Exchange-Traded Funds (ETFs), the financial tool designed to make investing simpler and more accessible. ETFs bundle together a collection of stocks, bonds, or other assets, allowing you to diversify your portfolio with a single investment.

But here’s the catch: while ETFs solve the problem of picking individual stocks, the sheer number of ETFs available today has created a new challenge. With thousands of options covering everything from broad market indices to niche sectors, the real question for modern investors is: Which ETFs should I invest in?

If you’re new to ETFs and want to learn the basics—what they are, why you should invest in them, and how to get started—I’ve covered it all in this YouTube video. In this blog, we’ll break down how to navigate the world of ETFs, helping you make informed decisions and build a portfolio that aligns with your financial goals.

Which ETFs Should You Add to Your Portfolio?

Different investors take different approaches to building an ETF portfolio. Let’s explore some common strategies, starting with a widely used one.

Case 1: The S&P 500-Only Approach

Many investors choose to invest solely in an ETF that tracks the S&P 500, an index representing the 500 largest publicly traded companies in the U.S. This approach provides broad exposure to the stock market and covers various industries.

However, while the S&P 500 is diversified across sectors, it includes only large-cap stocks, meaning investors miss out on potential growth from small-cap stocks. Some consider this a limitation, as small-cap stocks can offer higher returns (albeit with more risk) over time.

Would this strategy work for you? That depends on your risk tolerance and investment goals. 

Case 2: The Total U.S. Stock Market Approach

Some investors believe the S&P 500 isn’t diversified enough since it only includes large-cap stocks. They opt for an ETF that tracks the entire U.S. stock market to gain broader market exposure.

This approach exposes all sectors and includes both large-cap and small-cap stocks. As a result, investors benefit from the stability of established companies while also capturing the potential high-growth opportunities of smaller firms.

By investing in the total market, you’re essentially betting on the long-term growth of the entire U.S. economy rather than just the top 500 companies.

Case 3: The Global Stock Market Approach

Some investors argue that focusing solely on the U.S. stock market is risky. Why? Because it means your entire portfolio depends on the performance of just one country’s economy.

To mitigate this risk, they choose ETFs that track the global stock market, offering exposure to companies across multiple countries and regions. This approach can provide two key benefits:

1. Access to growth opportunities worldwide – Emerging markets and international companies can sometimes outperform U.S. stocks.
2. Greater diversification – If the U.S. market struggles, strong performance in other regions can help balance your portfolio.

However, a global portfolio also comes with challenges, such as currency fluctuations and geopolitical risks. 

Case 4: Geographically Focused ETFs

Investors looking to diversify beyond the U.S. stock market often turn to geographical-based ETFs. These funds focus on stocks from specific regions or countries, allowing investors to target markets they believe have strong growth potential.

There are several approaches to this strategy:

International ETFs – These track stocks outside the U.S., providing exposure to established global markets.

Emerging & Frontier Markets ETFs – These focus on high-growth economies like India, Brazil, or Southeast Asia, which can offer significant upside (but also more risk).

Country-Specific ETFs – Some investors prefer to target specific markets, such as China, Japan, or South America, based on economic trends or personal convictions.

By investing in geographical-based ETFs, you gain access to diverse economies and industries, reducing reliance on the U.S. market alone. However, these funds also come with risks like currency fluctuations, political instability, and varying economic conditions.

Case 5: ETFs That Track Alternative Assets

While most ETFs focus on stocks, some investors diversify further by adding ETFs that track other asset classes. These funds provide exposure to assets like:

Bonds – Fixed-income ETFs offer stability and can help balance stock market volatility. By investing in bonds through ETFs, investors can receive regular interest payments while reducing overall portfolio risk.

Gold & Precious Metals – Precious metals, particularly gold, are often seen as a hedge against inflation and economic uncertainty. Gold ETFs allow investors to gain exposure to this asset without the challenges of storing and securing physical gold.

Bitcoin & Cryptocurrency – Crypto ETFs provide exposure to digital assets like Bitcoin and Ethereum without the need for direct ownership. This means investors can participate in the cryptocurrency market without dealing with exchanges, private keys, or storage risks.

Real Estate (REITs) – Real Estate Investment Trust ETFs enable investors to benefit from property markets without owning physical real estate. These ETFs typically include companies that manage income-generating properties, offering potential dividends and long-term capital appreciation.

Instead of purchasing these assets directly—which can be costly, illiquid, or complex—investors can gain exposure through ETFs in a more convenient and diversified way. This strategy helps reduce risk by spreading investments across multiple asset classes, making a portfolio more resilient in different market conditions.

Best ETFs for Kenyan (or Non-U.S.) Investors

For investors outside the U.S., the reasons for investing in U.S. stocks and ETFs often differ from those of American investors. Instead of focusing solely on domestic market growth, we prioritize:

1. Access to world-leading companies like Apple, Microsoft, Tesla, and Amazon, which dominate their industries and drive innovation.
2. Currency risk mitigation.
3. Exposure to the strong performance of the U.S. stock market.

With these objectives in mind, what ETFs should a Kenyan investor consider? It depends on your financial goals and level of expertise in understanding and dealing with some complex products like leveraged and Inverse ETFs. However, as a general guide, here is what to avoid:

1. Bonds & Real Estate ETFs – These offer stability but lower long-term growth. U.S. stocks provide better returns and currency protection.
2. Short-Term Strategic ETFs (Leveraged & Inverse ETFs) – Designed for trading, not investing. High risk, not ideal for long-term wealth building.
3. Over-Diversified ETFs (Total World or Total U.S. Market ETFs) – Broad exposure but includes many low-growth stocks. Focus on high-performing indices instead.
4. Overlapping ETFs – Avoid redundancy. For example, Nasdaq 100 ETFs (QQQ) and Magnificent 7 ETFs hold similar stocks. The same applies to S&P 500 (VOO) and Total U.S. Market ETFs (VTI). Pick one.

Instead of these, here is what I would go for:

1. Simple Strategy: S&P 500 ETF

If you want broad U.S. market exposure, an S&P 500 ETF (VOO, SPY, IVV) is enough. Its historical 10.57% annual return since 1957 makes it a solid long-term choice.

2. Sector-Specific ETFs

For higher growth potential, consider thematic ETFs that focus on booming sectors like Semiconductors and Nuclear Energy.

3. Non-Equity ETF

To diversify beyond stocks, I’d add an ETF tracking Bitcoin or gold for currency protection and inflation hedging.

Final Thoughts

The S&P 500 ETF offers solid U.S. market exposure with an impressive 10.57% annual return since 1957 for a simple yet effective strategy. If you want more targeted growth, consider thematic ETFs in booming sectors like semiconductors or nuclear energy.

For added diversification, include non-equity ETFs that track assets like Bitcoin or gold, which offer protection against inflation and currency fluctuations. By combining these ETFs, you can build a diverse, growth-focused portfolio that aligns with your investment goals.

For more investment strategies, check out my posts under Finance or Kenyan Markets on my website.