Over the 30 years since the establishment of the first Exchange Traded Fund (ETF), these products have grown exponentially in both size and range of available options. ETF investors can today invest in almost any location, asset class or even sector. All this comes at a low price and with the simplicity of a single trade on their local stock exchange. It is no wonder that the total assets under the management of ETFs globally were over $ 4.5 trillion in 2018. Here are five reasons to consider the ETF as part of your investment strategy.
1. Invest in what you know – but what if you invest in what you know burns a hole in your pocket?
Recent financial research from Vanguard found Australians 66.5% of their portfolios in Australian stocks. When investing in the Australian sharemark, you basically buy financial stocks and miners. The financial sector accounts for 30% of the domestic market, while resources make up 25%.
Even professional investors are the victims of home control. In a study of fund managers' views on the prospects of international markets, fund managers from the US, UK, Europe and Japan show significant relative optimism towards their home market.
Home bias can leave portfolios with high exposure to similar risks and investment cycles, which can mean a greater chance of loss. It may also mean that potentially better opportunities are missing elsewhere.
The key to overcoming home bias is diversification. Diversification is about choosing assets that move differently. Cross-asset diversification, geographic countries, economic cycles, and duration can improve the portfolio's risk profile while helping to improve returns.
With ETF, diversification is easier than ever.
2. Pure Exposure and Liquidity
With an ETF, you do not run the risk of changing your investment style with a traditional fund manager, giving you reliable market exposure. Most ETFs are liquid investments, and while investors should avoid the market economy, they sell the others on the market while helping to provide liquidity to the market.
3. Avoid and Understand Cash Drawn
Most investors hold some of their portfolios in cash. Since the markets are higher most of the time, cash usually works as a draw on performance. To avoid this cash flow, investors can invest in an ETF until they need to put the money at work.
Cash moves can also work negatively in an ETF. While dividends can typically be paid monthly, quarterly or semi-annually, this means that the ETF does not replicate the accumulation index, and this dividend ̵
For most investors, costs are an important consideration. Many studies have shown underperformance in the market related to transaction costs and expenses. As transaction costs and fees fall, more capital is available to leverage the power of compound returns. The ETF has a lower cost structure than traditional managed funds, and has contributed to lower management fees for investments.
5. Be smart
Many fund managers end up crushing an index, which means that portfolios are biased toward market capitalization or size. This bias makes little sense as an investment style, and there are better ways to assess the size of positions. Smart Beta ETFs make it possible to adjust investments according to multiple return-seeking factors such as earnings moment, price momentum, quality, ESG and steering strength.
You can trade in a wide range of ETFs to get exposure to Australian sharemark, international stock markets, goods, currencies, sectors, styles and themes. With so many options out there, it's important to know that some ETFs are more complex and risky than others. As always, do your homework and read the product disclosure statement to find out how tight ETFs can render your goal.
Finally, most of us cannot be big in all things. ETFs increase the number of options available to investors to create more optimal portfolios.
Try ETFs without trading costs
For a limited time, you can join Bell Direct and trade ETFs for free. This special offer is available until June 30, so take advantage of it while it lasts.