Diversify Your Portfolio with Exchange Traded Funds
If you are an individual investor with mutual funds and stocks, you may want to consider beefing up your portfolio with exchange traded funds (ETFs). Like mutual funds, they provide the investor with ready access to various stocks and bonds; they are also a cost-effective way to diversify your portfolio with passive-managed assets. Unlike mutual funds, ETFs can be fully liquidated at any time during the trading day. The distributions from ETFs include the taxable assets in the cost of the trade; preventing the investor from having to pay capital gains taxes down the road.
To build up and diversify your portfolio effectively, you need to combine asset classes. Each asset class behaves differently; combining them skillfully is the key to a healthy portfolio with strong dividends. ETFs are among the instruments of choice for private investors when it comes to diversifying their asset classes. Tied as they are to a market index, they reduce the investor’s overall risk. Where large cap stocks can be highly volatile, ETFs remain fairly predictable. Ideally, the private investor should have both small, mid and large-cap stocks and mutual funds in his portfolio; along with ETFs to provide a buffer against the relative volatility of the stocks and bonds.
ETFs actually contain numerous asset class representatives: stocks from emerging markets, small to mid cap stocks, and sector exchange trades. Sector ETFs are funds that invest in a particular sector of the market; oil, technology, and precious metals are examples (the sector is usually identified in the fund’s title). Most are U.S. based, but more and more global sector ETFs are now being traded. In periods of high market volatility (such as we are experiencing presently), all equities tend to underperform. Fixed-income ETFs with single-digit volatility provide the investor a hedge against inflation.
Whereas mutual funds typically charge 1 to 1.5 percent, ETFs charge only about .25-.50 percent, a considerable savings. Cutting down on your total fee outlay is essential to realizing real profits in the market over time. ETFs require much less scrutiny on the part of the investor, while active-managed assets often require constant analysis. For an individual investor with full-time responsibilities outside the investing world, this can be absolutely key to investment success. Funds that essentially take care of themselves can help you diversify your portfolio while reducing your overall market risk.
Posted in About ETFs