Like many investors, you may already have an existing portfolio of stocks or even real estate investment trusts (REITs). While these have a place in your portfolio, there is a type of investment that could further improve your portfolio – exchange traded funds (ETFs).
Think of an ETF as a basket of stocks, bonds or other asset class that you can buy or sell on an exchange, just like shares of a publicly traded company. ETFs are designed to track and replicate the performance of a market benchmark or index. With just one ETF, you are effectively investing into all the companies or securities within that index.
Whether you want to build a portfolio that pays for your child’s education or funds your dream retirement, ETFs offer the following benefits that can help you achieve your goals.
#1: Keep your costs low.
ETFs are a form of passive investing. As a result, they have much lower fees and expense ratios than actively managed investments like unit trusts. They are also substantially more cost-effective than investing in individual shares.
One popular example is an ETF which tracks the S&P 500 Index – the SPDR S&P 500 (SPY) ETF. The S&P 500 is a US stock market index of the top 500 companies listed on the New York Stock Exchange. Buying the SPY ETF allows investors to conveniently gain exposure to the US market without having to buy 500 individual stocks. Unless you have very deep pockets, most investors will find the trading and brokerage charges of such an endeavor prohibitively expensive.
#2: Broaden and balance your portfolio.
Are you invested in only a handful of stocks or REITs? Chances are, there may be certain gaps within your current portfolio. ETFs can help you build a stronger, more diversified portfolio so you are less dependent on how well a single company’s stock performs. An all-equity portfolio should also be balanced with bonds. Bonds offer safe and steady returns that have low correlations to stocks. This reduces your portfolio’s overall risk as well.
Ultimately, ETFs are a great way to broadly diversify your portfolio at low cost. Proper diversification is crucial for long-term investment success; it is a strategy that will help you generate better portfolio returns over time while minimising risks.
#3: Easy access to global opportunities.
ETFs offer access to a broad range of asset classes, sectors, and virtually all investable markets. With a few ETFs, you can conveniently – and affordably – invest beyond Singapore, in global tech stocks the likes of FAANG (Facebook, Amazon, Apple, Netflix, and Google), big-name brands from around the world such as Swiss consumer giant Nestle, and even US government bonds.
#4: Provide income and long-term growth.
ETFs can help generate income through bonds. While bonds usually issue interest payments every six months, bond ETFs tend to pay interest monthly. This gives investors a more regular income stream to use or reinvest.
ETFs provide long-term growth potential as well. If you own an ETF that tracks the stock market like SPY, you will build wealth over time from a combination of capital gains – the increase in price of the stocks your ETF owns – and any dividends paid out by these stocks.
#5: Simple to invest in.
ETFs are purchased like a stock and you can buy or sell them any time the stock market is open. Like stocks, the drawback is that you incur brokerage fees each time you buy or sell.
One way is to invest in ETFs through a digital wealth management platform like Syfe. Syfe offers a wide range of ETF portfolios that are globally diversified and invested across a broad range of asset classes and sectors. Best of all, Syfe absorbs all brokerage and transaction fees. You can set up monthly deposits with Syfe without worrying about brokerage charges. This lowers your investment costs even further, which leaves you with higher returns.
A core satellite ETF investing strategy
One effective ETF strategy to consider is a core satellite approach. The core refers to a portfolio’s foundation, which typically consists of a globally diversified ETF portfolio to approximate an investment into the entire market. The satellite is made up of smaller investments into particular sectors or even single stocks. This could potentially supplement your core with higher returns if your chosen sector outperforms the market or your stock pick turns out well.
While a core satellite strategy sounds complex, implementing such a strategy is surprisingly simple. If you already have exposure to certain stocks or REITs, you can choose one of Syfe’s Global Portfolios as your core. If you are new to investing, you can use the Global Portfolio as your core, and add Syfe’s REIT+ portfolio as your satellite.
Savvy investors seek to continuously improve their portfolios. ETFs can give you a well-diversified portfolio with lower costs and stable market returns. Regardless of which investing strategy you choose, ETFs are versatile enough to meet your investment goals and help you grow your wealth.