An ETF (exchange-traded fund) consists of various securities, already offering a degree of diversification. Holding multiple ETFs in your portfolio, in turn, provides further diversification. Because of trading costs, it can even work out cheaper than owning multiple individual securities. Automatic investment solutions such as robo-advisors also often use this strategy, assembling a portfolio of ETFs for their clients.

What are the benefits of an ETF portfolio?

Most ETFs have a "theme" that determines the composition of that particular ETF. For example, an ETF can represent and cover

  • specific industries (e.g. the Utilities Select Sector SPDR Fund covers US utilities)
  • regions (e.g. the iShares MSCI All Country Asia ex-Japan ETF)
  • market caps and styles (e.g. the iShares Russell 2000 Growth ETF)
  • investment strategies (like the VanEck Vectors Social Sentiment ETF)
  • specific commodities (e.g. the Aberdeen Standard Physical Silver Shares ETF)
  • other themes (e.g. ESG investing)

 

Some ETFs offer a degree of diversification in themselves; for example, the iShares Core MSCI World ETF gives broad exposure to a wide range of global companies across 23 developed countries. However, more thematic and niche ETFs don't offer this level of diversification, so those seeking wider exposure should build a portfolio of ETFs.

For example, many US investors have some home bias and only invest in ETFs that hold only US equities. One could argue that they'd be better off diversifying into ETFs with exposure to other regions as well.

What else do you need to know about ETFs?

Want to know more before deciding which is the best ETF for you? Check out these articles to deepen your knowledge:

How can I buy ETFs?

For more info, click here to learn how to buy ETFs online.

Author of this article

Gergely Korpos

Author of this article

Gergely is the co-founder and CPO of Brokerchooser. His aim is to make personal investing crystal clear for everybody. Gergely has 10 years of experience in the financial markets. He concluded thousands of trades as a commodity trader and equity portfolio manager.

Gergely Korpos

Co-founder, CPO

Gergely is the co-founder and CPO of Brokerchooser. His aim is to make personal investing crystal clear for everybody. Gergely has 10 years of experience in the financial markets. He concluded thousands of trades as a commodity trader and equity portfolio manager.

Everything you find on BrokerChooser is based on reliable data and unbiased information. We combine our 10+ years finance experience with readers feedback. Read more about our methodology

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