How to diversify your portfolio with ETFs?
Exchange-traded funds (ETFs) are becoming increasingly popular among investors.
ETFs allow people to buy small pieces of many different companies’ stocks at once, which means you benefit from spreading risk around.
This kind of diversification is great for young investors building up their portfolios because it has less impact on your returns than having a lot of money in just one or two investments. You can also invest much smaller amounts because the costs are lower with ETFs than investing directly in individual companies.
On top of that, buying an ETF gives you exposure to lots of countries and industries without the hassle of needing to manage multiple accounts or select different types or a mix of investments. ETFs are fantastic investment products, but you need to know how to use them.
Here are just some of the benefits of ETFs
- They have low costs compared to traditional mutual funds.
- You only buy a tiny amount of each company, so if one goes bust, it doesn’t affect your return as much
- The index the ETF represents is probably already diversified, so you don’t have to think about it too much.
It’s essential that you still do your research before picking an ETF because there are hundreds out there, and different ones will perform differently depending on what they hold. If you’re not sure where to start, I would recommend looking at well-known indices like theDow Jones, FTSE 100 or the S&P 500. Just remember that different ETFs hold different companies, so not all indices are made equal.
Ensure ETFs track index
It’s also worth checking to make sure your ETF tracks an index because otherwise, it might be a bit more challenging to know what you’re investing in and who is managing it. If you can’t find the ETF on Google or Yahoo Finance, it probably isn’t an index fund.
Buy through brokers
You can buy these kinds of investments through most brokers. Still, you should consider using a discount broker because there are other benefits, too, like having access to foreign markets without needing multiple investment accounts or finding unique ways to invest your money when other investors don’t let you.
Find out which broker is best for you with our guide.
It’s also important to remember that ETFs are not risk-free. Even though they have less risk than regular investments, things can still happen that might affect the price of your ETFs, so look out for this kind of event in the news or follow companies directly to make sure you know what’s happening.
It’s also worth remembering that the market is down now, so it might be harder to earn money with investments like this because you can’t just buy low and sell high all the time. If your investing horizon is long enough, this shouldn’t affect you much, but if you need access to cash soon, then doing something else might be a better idea right now.
If you’re still struggling for cash, then you might want to invest less than you can afford because it’s better than putting nothing in at all.
Even though ETFs are great for diversifying your portfolio, they aren’t the only way. You could also consider doing something like peer-to-peer lending, which helps you spread risk around too but comes with some other perks on top of that. Investing is often complicated, but proper diversification is beneficial even when there are simpler alternatives, so always remember that different types of investment come with different risks and potential returns.
And don’t forget, if you’re interested in this kind of thing, then studying finance at university will help you learn more about investing while letting you make enough money to do it full time. So, now you know how to diversify your portfolio with ETFs.