ETFs, or exchange traded funds, are collections of securities that can be traded on centralized exchanges as if they were shares in a company. The main benefit of this approach is that they are a great way for investors to diversify their holdings.
Some ETFs are designed to track an index such as the FTSE 100 or S&P 500. Others track sector performance, such as the technology sector.
Because ETFs are designed to track an index or a sector, they can offer very attractive ongoing costs – as low as 0.06% in some cases. Bear in mind, however: the more specific the index, the harder it is to track and therefore the higher the ongoing cost. Always read the fund literature before investing.
Due to the diversification that stock-based ETFs offer, they tend to be less risky than individual stocks but riskier than fixed-income assets (such as gilts or bonds). That said, some ETFs include a basket of stocks and bonds – although most tend to focus on either bonds or stocks exclusively. The higher the proportion of bonds to stocks in an ETF, the lower the risk profile of the ETF. As we know, when we lower the risk of our portfolio, we sacrifice potential returns in favour of stability.
Do Exchange Traded Funds belong in my portfolio?
ETFs offer many benefits and will likely deserve a place in your portfolio. To discuss how to do this, feel free to book in a free consultation with me.
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