If you want instant diversification, look no further than ETFs. These types of investments are your bread and butter when it comes to looking for easy ways to diversify your portfolio.
While they may not be able to provide the huge growth that individual stocks can, ETFs are great ways to add stability and consistent gains to your portfolio.
Check out our video on the topic.
What is an ETF?
An Exchange Traded Fund (ETF) is a type of security that tracks an index/portfolio. They can be bought and sold on a stock exchange in the same way as a regular stock.
ETFs were first developed in the 1990s to provide access to passive indexed funds for investors. Since then, ETFs have grown in popularity as they make great diversification options.
There are a wide variety of ETFs available on the market, representing everything from broad market indices to niche sectors and geographies.
What are the advantages of ETFs?
Similar to mutual funds, an ETF is composed of multiple investment securities (e.g. equities, bonds, currencies, bitcoin, gold, etc.). Holding ETFs lowers an investor’s risk as they are not relying on the success of one particular security or company.
- Variety of choice
Equity-based ETFs are a popular option. These investment types can be focused on the performance of a stock market (e.g. New York Stock Exchange), a particular type of company (e.g. small caps), a specific sector (e.g. health), or a cross-sector theme (e.g. growth). This allows investors to own shares in a specific area that is of particular interest to them.
- Lower Fees
In contrast to mutual funds, most ETFs are not actively managed and instead are linked to a predefined bundle of shares, like the S&P 500. This passive approach reduces the need for expensive investment analysts, so the fees are lower. Actively managed ETFs can have similar costs to mutual funds, but these types of ETFs are less popular with investors.
- Tax Benefits
Due to differences in structure, mutual funds typically incur more capital gains taxes (CGT) than ETFs. Also, an ETF only incurs CGT once it is sold by the investor, whereas Mutual Funds pass on CGT to investors through the life of the investment.
Examples of the most popular of ETFs
- Vanguard S&P 500 (VOO)
The Vanguard S&P 500 ETF (NYSEARCA: VOO) is made up of the largest 500 companies in the U.S. Some of the organizations that make up this ETF include Apple, Microsoft, and Amazon. It was created in 2010 and since then the average rate of return has been around 15%. It is also most appropriate for those investors looking for long-term growth on their investment.
- Vanguard Growth (VUG)
The Vanguard Growth ETF (NYSEARCA: VUG) tracks the performance of the CRSP U.S. Large Cap Growth Index and currently includes 287 stocks that have the potential for rapid growth. This fund is heavily weighted towards the technology industry, but it also includes stocks from nearly a dozen different sectors. This ETF was launched in 2004, earning an average rate of return of more than 11% per year since then. The fund has been awarded a 4-star rating by Morningstar, one of the leading investment research companies.
- iShares Russell 1000 Growth (IWF)
The iShares Russell 1000 Growth ETF (NYSEARCA: IWM) is the third-largest large-cap growth ETF, with $74 billion in net assets. It differs from the Vanguard Growth ETF in that it tracks a broader section of the market, as it mirrors the performance of stocks within the Russell 1000 which are expecting above average growth – currently this covers 498 individual stocks from a variety of industries. This ETF was created in 2000, so it is well established compared to some of the alternative options. Since its inception, this fund has earned an average rate of return of around 7% per year.
Read the other articles in our Diversify series here;