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How to Build a Passive Income Portfolio Using ETFs (And Why You Should)

Alevin Chan

Alevin Chan

Last updated 01 August, 2023

A well-diversified passive income portfolio can be a great way to build your wealth over time. Here’s how you can use ETFs to achieve this.

If you’re looking to secure your future financially or to achieve a modest but comfortable retirement, investing is likely to be your best option.

As most retail investors like you and I would not have the know-how to stock pick or monitor the stock markets closely, the next best thing to do is to identify low-cost index funds such as Exchange-Traded Funds (ETFs) to grow our cash in. 

To the uninitiated, investing can be complicated and bewildering, conjuring up images of spiky price charts and roller coaster emotions. In reality, if you're doing it right, investing is actually quite sedate, even a bit boring. 

When it comes to building your wealth through investments, slow and steady is what you want, and passive income is the name of the game.


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What is a passive income portfolio?

A passive income portfolio is an investment portfolio composed of instruments that provide income on a regular basis, without you having to do anything.

It is basically a set-it-and-forget-it type of strategy, and once properly set up, all that’s left for you to do is to watch your money grow. 

Depending on your finances and preferences, you may also want to invest more money periodically to help your portfolio grow faster, or to take advantage of new opportunities that you may come across. 

You can make some tweaks and adjustments here and there, but ultimately, passive income works best if you leave it alone and let time do its thing. 

The key to passive income is dividends. Some examples of dividend stocks are banks, 

By focusing on dividend-paying investments, you’ll build a steady stream of income that comes in without further effort on your part. 

This passive income can then be reinvested into your portfolio to take advantage of compound interest, or you might perhaps spend it. Hey, it’s your money, so it’s completely up to you.

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For whom are passive income portfolios best suited?

As stated above, a passive income portfolio works best if you leave it alone. 

Dividends are paid out a few times a year, so pulling out and switching your investments haphazardly can cause you to lose out on dividends you would otherwise have been entitled to. 

Also, the level of dividends you will receive depends on the capital you have invested. This means that if your starting capital is small, the dividends you initially see may be too low to keep you motivated. 

However, once your capital grows large enough, your passive income should start looking more substantial as well.

All this means that passive income portfolios require patience and commitment. You have to be willing to let compound interest work its magic, and also keep adding to your capital until you get the results you want. 

ETFs — the secret sauce in your passive income portfolio

We have discussed what passive income portfolios are and who they are suited for. But how do you actually go about setting one up? 

Here’s the secret ingredient: Exchange-Traded Funds or ETFs. And since we’re focusing on passive income, we only want those that pay out dividends. 

We’ll get to some recommended dividend-paying ETFs you can check out later in the article, but first, let’s discuss the two main reasons why you want these in your passive income portfolio.

ETFs offer easy diversification 

The singular reason to invest in ETFs is because they provide an easy way to diversify your portfolio and reduce the impact of market volatility

For those unfamiliar, ETFs are funds that are composed of a basket of different securities, such as stocks, bonds, indices, commodities, etc.

So, instead of trying to buy individual shares of, say, the top 30 companies in Singapore, you can achieve similar results simply by buying into an ETF that tracks the performance of those 30 same companies.

ETFs are more affordable

ETFs have lower fees than other types of investments, such as unit trusts, making them a more affordable option.

ETFs also do not have any required minimums to start investing — you can start investing with as little as a single share of the ETF.

Another way ETFs make investing more affordable is by allowing you to own fractional shares of multiple companies. If you were to buy individual shares of the companies you want to invest in, the total cost may be too high for your budget.


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Pros and cons of passive income ETF portfolios

Pros Cons
Provides steady income without further input Requires patience and commitment, especially at the beginning
Virtually maintenance free, once set up properly Initial results may be lacklustre, especially if starting capital is small
Achieve diversification at low cost   

As you can see from the table above, using dividend-paying ETFs in your passive income portfolio is highly advantageous.

It provides steady income, is virtually maintenance-free, and allows you to have a diversified investment portfolio without needing a large budget upfront. 

However, passive income ETF portfolios are not without their drawbacks (or at least, idiosyncrasies). As discussed earlier, you’ll need to have patience and be committed to your portfolio, and be willing to see through the initial period, which is likely to be dull.   

4 popular dividend-paying ETFs for passive income 

Dividend-paying ETF 3-year returns Dividends paid out
SPDR® Straits Times Index ETF (SGX:ES3) 4.93% Quarterly
Nikko AM STI ETF (SGX:G3B) 4.87% Annually
LION-PHILLIP S-REIT ETF (SGX: CLR) 4.39% Semi-annually
NikkoAM SGD IGBond ETF (SGX: MBH) 2.25% Annually

SPDR Straits Times Index ETF

This ETF attempts to replicate the performance of the Straits Times Index (STI), which tracks the performance of the top 30 listed companies in Singapore. Some of the top holdings in this ETF include DBS, UOB, OCBC, CapitaLand and SingTel. 

Over the past three years, the fund reported 4.93% annualised returns. Dividends are paid out every quarter.


The Nikko AM STI ETF is another fund that also tracks the STI, proving the popularity of the index among Singaporean investors. 

The top holdings in this EFT are the same as its sibling, so it’s not surprising that it has a similar three-year return of 4.87% per annum. 

For this ETF, dividends are paid out once a year.


The LION-PHILLIP S-REIT ETF is composed of leading REITs in Singapore, which means the fund is purely focused on the real estate sector here. (REITs stands for Real Estate Investment Trusts).

As such, its top holdings are commercial and retail developers such as CapitaLand, Frasers Centrepoint, Ascendas and Mapletree.

This ETF recorded a three-year annualised return of 4.39%. It pays out dividends to fundholders twice a year. 


Rounding out our shortlist is the NikkoAM SGD IGBond ETF. 

As you can guess from its name, this ETF focuses on investment-grade bonds that are denominated in the Singapore Dollar, with the exception of Singapore Government Securities. 

This fund managed an annualised three-year return rate of 2.25%. Dividends are paid out once a year. 

Read these next:
What ETFs Are And Why Warren Buffett Advocates Them
Investing In Exchange Traded Funds (ETFs): A Newbie’s Guide To Getting Started
Best US Exchange Traded Funds (ETFs) To Invest In (2021)
Guide to Value Investing, and Why You Should Consider Value ETFs
Best ETFs In Singapore For Tracking Stocks, Bonds And REITs

An ex-Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimise happiness and enjoyment in his life.


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