When it comes to portfolio construction, ETFs are a powerful tool. A single ETF enables investors to buy an entire market, a market segment, or a strategy with just one trade. This means instant access to a full basket of underlying securities.
As ETFs continue to grow in popularity, predominantly due to their diversification and cost benefits, it’s important to note what role they can play when constructing a globally diversified portfolio.
Investors are presented with a near infinite number of options and possibilities when constructing portfolios using ETFs. The ever-expanding industry allows for the construction of portfolios that target specific levels of risk, geographies, sectors and asset classes.
The many benefits ETFs bring to a portfolio can be identified predominantly as diversification, liquidity, cost of ownership and transparency.
Diversification: ETFs allow investors to buy one security and gain exposure to many underlying stocks/bonds/commodities. They also cover major asset classes and sectors offering a wide range of instruments to build portfolios. Some ETFs also cater for specific industries which can be more difficult to buy and sell individual stocks and bonds.
Liquidity: ETFs trade like stocks, meaning investors are free to move in and out of them whenever they see fit.
Cost: The cost of owning an ETF, also known as the TER (total expense ratio) allows investors to buy a basket of securities and pay as little as 0.04% a year to do so. This is one of the main benefits of ETFs when you compare them with mutual funds.
Transparency: Most ETF providers disclose their holdings daily allowing investors to know exactly what they are exposed to. ETFs typically also track an publicly available index, further increasing their performance transparency.
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