There are many ways investors can incorporate ETFs into their portfolios, including as the stable core or as diversifiers.
ETFs have become a hugely popular investment product around the world because they are relatively low cost and highly accessible to the everyday investor.
Here are some ways investors can use ETFs in their portfolios, depending on their investment goals and portfolio strategy.
ETFs as a portfolio
For many new investors, or those who don’t have the time or resources to construct a portfolio using individual investments, ETFs can serve as the primary investment vehicle.
Diversified ETFs that include multiple asset classes and are structured to align with different risk profiles essentially act as a portfolio in itself.
Instead of selecting individual equity, fixed income or other investments, diversified ETFs come readily packaged with an asset allocation in place. Investors just have to decide on their investment horizon and risk profile, and can then easily select the diversified ETF that best aligns to their goals.
For example, if you’d like to balance capital growth with capital protection, and comfortable with some risk, then a balanced diversified ETF with a 50 per cent allocation to equities and a 50 per cent allocation to fixed income may be most suitable.
Oftentimes the most daunting part of investing is deciding which securities to buy. Diversified ETFs make it easy to start investing because it’s not only cost effective, but it reduces the amount of decision-making required when constructing a portfolio using individual investments.
Alternatively, investors can also mix and match different ETFs to build a portfolio. This can include choosing both index-based ETFs and active ETFs.
ETFs as the core
For those wanting to tailor their portfolios more closely to their individual interests, but still without the costs and higher volatility associated with individual securities, using ETFs as the stable core of their portfolio can be an effective investment strategy.
The core-satellite strategy suggests using broad-based index ETFs as the "bulk" of a portfolio, and then using individual securities or actively managed funds to complement.
This way, investors can use ETFs to ensure they are adequately diversified yet still invest in specific companies or sectors that pique their interest.
ETFs as diversifiers
For more experienced investors, ETFs can be used as portfolio diversifiers when more complex investment strategies are employed.
Investors can use specific ETFs to add a "tilt" towards asset classes they believe have higher growth potential, or balance out under-represented sectors or regions. As each ETF is inherently diversified, they can also help to reduce risk and reliance on picking winners.
Smart Investing