Exchange Traded Fund is marketable security, which tracks stock index, bonds, assets or commodity. ETFs cost is low and so these instruments is getting popular quickly. Moreover, ETFs can add value to an investor’s portfolio. Investor needs to select a core ETF and individual securities, which are anticipated to outperform the goal and form a protective shield around ETFs.
How adding ETF can boost portfolio value?
Investors may tend to concentrate their funds in stock types having similar risk characteristics. So, adding ETFs offers instant diversification alleviating the overall portfolio risk. Use of ETFS to improve investment portfolio
offer an offsetting medium between risks and returns.
Large portion of stocks underperform, so an average investor suffers considerably. If some stocks are sold and replaced with wide ETF core holding then the overall performance of the investor’s portfolio gets enhanced.
Easy to rebalance
When ETF is applied as core position with other assets then it becomes easy to make changes. For example, if investor desires to widen his/her equity exposure than purchasing extra ETF shares is easy.
It is hard to monitor as well as manage more stocks included in a portfolio. There are many investment decisions to be made after considering multiple factors which differ in the variety of company stocks you hold. With ETF at core position decreases the stock number to manage and monitor thus making portfolio less complex and straightforward to understand.
It is also crucial to consider the tax impacts on returns. Excessive diversification generates more trading activities as investment and market outlook changes. More trade transactions mean more capital gains get realized, thus creating high tax liability for investors. On the other hand, ETFs are tax-efficient because with large portion of portfolio in solo core ETF triggers few capital gains.
Low transaction fees
Limited stocks mean few trades and less commission. ETFs carry small yearly management fees, which gets recovered from the broker’s commission savings, which can be dramatic.
As ETF represents core holding, the volatility of overall portfolio reduces in comparison to the one including totally stocks. ETF itself is diversified, so unlike stock cannot experience possible price swings.
In a well-organized and well-diversified portfolio, investors may have included stocks from sectors or companies, he/she is not interested in but needs to own it for the purpose of mitigating risks
. Nevertheless, with ETF as core position the required diversification allows investor to concentrate on preferred stocks.
With ETF core position approach, it becomes easy to implement investment strategies like –
- Portfolio insurance
- Improved index strategies
- Tax loss harvesting
- Style tilts
Better investing skills
Implementing core ETF strategy properly needs knowledge and familiarity of market indexes, risks, portfolio management strategies, and financial goals. Investors apply their knowledge and gain experience. Ultimately, they become better investors.
On specific inexpensive ETFs, some brokers offer no-commission trading, so small investors get a chance to take advantage of it easily. Recreate your portfolio with ETF core/satellite approach.