ETFs are a quick, easy method used to diversify your investment portfolio. Broad diversification with low fees are the ideal situation for investors just starting their portfolios. Diversification allows for the best portfolio protection possible while also investing globally in many cases.
Benefits of an ETF Portfolio
ETF portfolios allow for instant diversification. You'll be buying, for example, an ETF in a financial services index that allows you to invest in a basket of financial stocks. You avoid the turmoil of economic conditions in the market because an ETF guards against volatility.
ETFs are:
- Passively managed (for most investors)
- Management fees are lower than mutual funds
- Higher performing than most other investment vehicles
Investopedia describes how to choose the right ETF, stating that you should compare similar ETFs to see how each has performed throughout the years. You can also learn about the average daily volume of each ETF and uncover liquidity through a wide bid/ask spread.
Portfolio Diversification Tips
Diversifying a portfolio with international ETFs is a great choice, and there are three areas of diversification that provides proper diversification and protection for a portfolio. You'll want to consider:
- Specific ETFs. Choose specific fields to invest in. The ideal option is three ETFs with unrelated fields and risks. You can choose medical device and financial, but healthcare wouldn't be a good choice since it overlaps with the medical device field.
- International ETFs. The inclusion of international ETFs is a smart choice. A good example is going through a list of the best ETFs in Canada and choosing based on technical data and fundamentals. The ETF may include an entire country, in this case Canada, or it can include an entire region. Individual stock allocation and sector allocation should also be considered.
- Commodity ETFs. The use of commodity ETFs is a must in any portfolio. ETFs that track a single commodity can perform well, but the risk that you take is being subject to volatility. If you choose gold as your commodity and the market plummets, you will suffer major losses as a result.
Risk tolerance also needs to be considered. If an ETF has too much risk, it may not be a good choice for you. Vanguard offers a slew of ETF options, too, with the Total Stock Market (VTI) being a great choice for starters.
You can also choose REIT options and diversify your portfolio further with bonds, CDs and individual stocks with each offering their own risk.
ETF portfolios can be balanced from the very start, with an often-recommended mix of stocks and bonds is 60 / 40. A few of the ETFs that offer this mix are:
- Vanguard Total Stock Market (VTI)
- Vanguard Total Bond Market (BND)
- Vanguard FTSE All-World e-US ETF (VEU)
True diversification comes from the Vanguard FTSE All-World ETF, a fund filled with foreign stocks which help round out a portfolio and protect against volatility.
Morningstar recommends a lot of great ETFs and options that can help you further adjust your and diversify your portfolio from across the globe.
Global stocks can also be sought with the Vanguard Total World Stock Market (VT), which gives investors access to stocks from all over the world. The index has more than half of its assets in North America, while the rest of the portfolio is comprised of stocks from Europe and the Asia-Pacific.
Expense ratios are also kept to a minimum. With the ratio at just 0.14%, the Total World Stock Market is a quick and easy way to diversify your portfolio.
Dividend ETFs are another great addition to a portfolio and work as an income-driving investment. Fund have returned as much as 14% in the past 5 years, meaning a person will earn $140 for every $1,000 invested – a great source of i
