If you’re looking for a safe and simple way to grow your money, then investing in an exchange-traded fund – otherwise known as an ETF – could be the right move for you. ETFs have been around since the start of the millennium, but ETF asset growth has really exploded in the years following the financial crisis of 2008.
According to ETF Strategist Benjamin O’Dwyer, ETFs in Europe have grown at a compounded annual growth rate (CAGR) of more than 16% during this time. In fact, from $228 billion in assets in 2010, ETFs began the new 2020 decade with a total asset base of more than $1 trillion. It is no wonder, then, that everyone wants to jump on board the ETF train.
But what makes ETFs so special? In this article, we will explore what ETFs are, why they are so attractive, why you should be investing in them, and how to make them your next investment move.
What is an ETF?
An ETF is a type of investment that consists of a collection of securities such as stocks, bonds, commodities, and other assets. They’re similar to index funds in that they track the performance of a market (such as the S&P 500), but unlike index funds, they can be traded like stocks.
Since ETFs are made up of many different securities, you are able to invest in a variety of assets all in one go – instead of trying to select individual “winners” or “losers”. As a result, you experience increased diversification as well as a decreased risk of major losses, which makes them particularly ideal for long-term investors.
Why are they so popular?
ETFs are becoming an increasingly popular way for investors to build diversified, low-cost portfolios. According to Armando Senra of iShares Americas, many factors are driving this record growth – from commission-free trading to the consequences of Covid-19 to the mainstream adoption of digital platforms.
Furthermore, they can be bought and sold on an exchange throughout the day, just like stocks, and can earn investors dividends depending on the kind of index the fund is tracking. Their built-in diversification, as well as the minimal amount of capital needed to start investing, are just a few more reasons for their acclaim.
6 Reasons to invest in ETFs
There are many reasons to start investing in ETFs. These are the ones that stand out the most:
- Industry leaders
- Diversification and risk management
- Reduced costs
- Simplicity and transparency
- Portfolios to reflect your values
Reason 1: Industry leaders
First and foremost, ETF issuers have been at the forefront of offering innovative products for years, which is one of the main reasons for their rapid growth. ETF providers have traditionally responded quickly to demand for products in hot industries.
This means that many of these providers are industry leaders, have track records for innovation, and can thus identify and even anticipate investor needs more easily. They have extensive knowledge and insight to share with investors looking to execute their financial goals with confidence.
Reason 2: Diversification and risk management
The key to investing is to find a happy balance between risk and return.
Diversification helps investors manage risk and reduce the volatility of an asset’s price movements. While there is no ‘perfect’ way to build your portfolio, diversification really helps you build a strong foundation for your investments.
ETFs have built-in diversification due to the fact that they invest in dozens or even hundreds of different companies while granting you access to almost every theme, sector, asset class, and region there is. This means that the poor performance of one stock may be offset by the higher-performing stocks. As a result, they are often less risky than buying individual stocks since, while one company’s fortunes may decline, the worth of a group of companies is less likely to be as volatile.
Reason 3: Reduced costs
A single share of an ETF is a combination of several different investments. As a result, using them to diversify your portfolio will be less expensive than it would be if you bought the same stocks separately.
Expense ratios for exchange-traded funds are often lower than other funds, like mutual funds. Furthermore, many online brokers offer commission-free ETFs – even to investors with less money. This can be especially beneficial to young investors, as excessive fees and charges can quickly deplete their account balance.
Reason 4: Passive investing
While active fund managers select their investments based on the ambition to outperform the index they are benchmarked against, passive investing simply seeks to replicate the wins and losses of the index.
Although the term ‘passive investing’ sounds boring, research suggests that the typical active fund manager underperforms the market after fees are factored in. Unless you can find a manager that routinely beats the market, the lower-cost option of an ETF is worth exploring. Remember, of course, to factor in any fees levied by your investment provider.
Reason 5: Simplicity and transparency
It is easy to start investing in exchange-traded funds. Because they are highly liquid and traded on an exchange, all you need to do is log in to your online brokerage account and choose your preferred funds to start investing. Furthermore, ETFs are professionally managed to achieve the fund’s goals, so the work of researching, buying and selling is done for you.
ETFs also provide more transparency than many other investment options. Most ETFs publish their holdings on a regular basis, allowing investors to comprehend risks better. Moreover, investors will know exactly which securities their fund is holding due to the fact that ETFs track published market rules-based indexes.
Reason 6: Portfolios to reflect your values
ETFs come with the opportunity to invest in certain themes, such as ethical or sustainable investing. As environmental wellbeing and social issues grow increasingly important for investors, ETFs make it easy for them to invest in line with their values.
How to start investing in ETFs
- Open a brokerage account
First, you will need to set up an online account through a broker or trading platform before you can start buying and selling ETFs. The majority of online brokers now provide commission-free stock and ETF trading, so price isn’t an issue. The best line of action is to examine the features and platforms of each broker. If you’re a novice investor, it’s a smart idea to work with a broker that offers a variety of teaching tools.
2. Choose the ETFs that best suit your needs
The number of shares you buy is mostly determined by the current share price and your personal financial circumstances. You will need to do a bit of research to make informed ETF selections each month.
3. Copy ETF portfolios developed by Robo-advisors
One of the best ways to choose ETFs and build a strong portfolio is to use a Robo-advisor that is designed to select the optimum asset allocations for your portfolio based on your personal level of risk tolerance.
These artificial intelligence-powered financial advisors take the worry and emotion out of investing while using algorithms to analyze historical data and current market trends, thereby carefully selecting the optimum investments each month for you to copy. For example, at arty, you receive a monthly rebalancing strategy with the latest optimal ETF selections, which you can copy to your own brokerage account to gain the best possible returns.
4. Let your ETFs do the work
ETFs are primarily designed to be low-maintenance investments. Newer investors have a habit of reviewing their portfolios far too frequently and reacting emotionally to large market movements. In reality, over-trading is the primary reason why the ordinary fund investor underperforms the market over time. So, once you’ve invested in some terrific ETFs, leave them alone and let them do what they’re supposed to do: generate exceptional long-term investment gains.
As you can see, ETFs have soared to stardom for many reasons. Thanks to the use of ETFs, investors can enjoy more investment opportunities, greater diversification, and significant cost reductions that would otherwise be unattainable to ordinary individuals. Here at arty, ETFs are a crucial part of our mission to democratize the wealth management industry and create greater investment opportunities for everyone.
If you are ready to start investing in ETFs and want to optimize your ETF selection process, arty could be an excellent choice for you. arty offers you custom portfolios to choose from based on your preferred level of risk and desired target return. Unlike other Robo-advisors, arty does not take custody of your money.