Should I include ETFs in my portfolio?
ETFs can be an easy way to diversify your portfolio
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
ETFs can be used within a portfolio to make short-term tactical adjustments to the asset mix to over- or under-weight certain styles, regions or industries, without having to invest in individual securities. This allows investors to respond to overall macro ideas while avoiding security-specific risks.
- Trading fees.
- Operating expenses.
- Low trading volume.
- Tracking errors.
- The possibility of less diversification.
- Hidden risks.
- Lack of liquidity.
- Capital gains distributions.
ETFs offer advantages over stocks in two situations. First, when the return from stocks in the sector has a narrow dispersion around the mean, an ETF might be the best choice. Second, if you are unable to gain an advantage through knowledge of the company, an ETF is your best choice.
It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.
Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation.
Properties of a good portfolio
Diversification: A well-diversified portfolio should include ETFs that cover different asset classes (stocks, bonds, commodities, etc.), sectors, industries, and geographical regions. This spreads risk and reduces the impact of any single investment on the overall performance.
Hold ETFs throughout your working life. Hold ETFs as long as you can, give compound interest time to work for you. Sell ETFs to fund your retirement. Don't sell ETFs during a market crash.
Limitations of ETF investments
It is crucial to take these into account before making any investment decisions: Reduced potential for returns: Due to their passive tracking of an index, ETFs may not exhibit significant outperformance of the market over the long term when compared to actively managed funds.
Why I don't invest in ETFs?
ETFs are most often linked to a benchmarking index, meaning that they are often not designed to outperform that index. Investors looking for this type of outperformance (which also, of course, carries added risks) should perhaps look to other opportunities.
ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.
For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
Should you invest in ETFs? Since ETFs offer built-in diversification and don't require large amounts of capital in order to invest in a range of stocks, they are a good way to get started. You can trade them like stocks while also enjoying a diversified portfolio.
ETFs make a great pick for many investors who are starting out as well as for those who simply don't want to do all the legwork required to own individual stocks. Though it's possible to find the big winners among individual stocks, you have strong odds of doing well consistently with ETFs.
However, it's important to balance diversification and complexity. Holding too many ETFs can limit gains and make it harder to manage, while holding too few can increase risk. Aim for around 10 to 20 diversified ETFs that align with your goals and risk tolerance.
One simple rule of thumb I tend to adopt is going by the 4-3-2-1 ratios to budgeting. This ratio allocates 40% of your income towards expenses, 30% towards housing, 20% towards savings and investments and 10% towards insurance.
The Rule of 120 (previously known as the Rule of 100) says that subtracting your age from 120 will give you an idea of the weight percentage for equities in your portfolio. The remaining percentage should be in more conservative, fixed-income products like bonds.
Symbol | Name | 5-Year Return |
---|---|---|
IYW | iShares U.S. Technology ETF | 23.99% |
SPXL | Direxion Daily S&P 500 Bull 3X Shares | 23.89% |
UPRO | ProShares UltraPro S&P500 | 23.55% |
FTXL | First Trust Nasdaq Semiconductor ETF | 23.34% |
Is it wise to invest in VOO?
Vanguard S&P 500 ETF holds a Zacks ETF Rank of 2 (Buy), which is based on expected asset class return, expense ratio, and momentum, among other factors. Because of this, VOO is a great option for investors seeking exposure to the Style Box - Large Cap Blend segment of the market.
Can you lose all your money from investing in ETFs even if you don't sell your position? Hypothetically: Yes. Practically: No. ETFs are stocks which derive their values from the underlying stocks of net assets of an investment.
TICKER | NAME | % Change |
---|---|---|
SCHD | Schwab U.S. Dividend Equity ETF | -0.343% |
VTI | Vanguard Total Stock Market ETF | -0.592% |
IJR | iShares Core S&P Small-Cap ETF | 0.369% |
ARKK | ARK Innovation ETF | -0.164% |
Also, beyond an ETF share price, there is no minimum amount to invest, unlike for mutual funds. Any broker can turn an investor into a new ETF holder via a straightforward brokerage account. Investors can easily access the market or submarket they want to be in. It is easily done through an ETF that tracks it.
In building a diversified ETF portfolio, investors should also consider their time horizon when choosing specific investments; long-term investors may choose to invest more heavily in growth-oriented funds such as small-cap equity or tech-focused funds, knowing they have a longer time period to help mitigate any short- ...