One way to diversify your portfolio is by investing in ETFs from different sectors.

Vanguard offers a wide range of sector ETFs to choose from. However, before deciding what to buy and how much to allocate, it is important to understand that diversification should not be done blindly. It should help reduce unnecessary risk while still giving your portfolio a realistic chance of achieving your goal.

One useful way to assess sector ETFs is by looking at their historical CAGR. While past performance does not guarantee future results, it can still give you a reasonable reference point for understanding how different sectors have performed over a long period. In this exercise, I also included VOO, the ETF that tracks the S&P 500, as the benchmark. Since VOO is the youngest ETF in this group, I used its inception date, September 9, 2010, as the common starting point for computing the CAGR of all the ETFs.

Based on this comparison, only VGT and VCR outperformed VOO over the period, while the rest underperformed. This highlights an important point: diversification is not simply about owning many funds or spreading money across many sectors. You must also consider the return potential of each investment. If too much of your portfolio is allocated to sectors with weaker long-term performance, your overall return may fall short of what is needed to reach your target. On the other hand, putting too much into sectors with stronger historical returns can also expose you to greater volatility.

At the same time, this should not be taken as a blanket recommendation for everyone to build a portfolio using sector ETFs. For many investors, especially ordinary people who want a simpler approach, a broad-market ETF like VOO may already be a more suitable choice than trying to combine several sector funds. Sector investing requires more thought, more monitoring, and more discipline in allocation.

This is why asset allocation should always be guided by your own situation. Time horizon is important, but it is not the only factor to consider. You must also take into account your capacity to invest, your required rate of return, and your ability to handle volatility. Generally, investors with a longer time horizon may have more room to allocate a bigger portion to higher-risk, higher-return sectors. But as your time horizon becomes shorter, it may be wise to gradually shift toward a more stable and less volatile allocation. Still, even this should not be applied mechanically, because no sector is automatically “safe” in all market conditions.

In the end, proper diversification is not about owning many ETFs for the sake of being diversified. It is about choosing the right combination of investments that balances growth potential and volatility in a way that matches your personal goal.

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