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:
- What is the difference between mutual funds and ETFs?
- What is the difference between US and EU ETFs?
- What does an ETF portfolio mean?
- What is an ETF expense ratio?
- How liquid are ETFs?
- How to buy Vanguard ETFs?
- How to buy iShares ETFs?
- What are sector ETFs?
- What is a passive investment?
- Are US ETFs only available for US residents?
How can I buy ETFs?
For more info, click here to learn how to buy ETFs online.