Whether you want to build a portfolio that pays for your child’s education or funds your dream retirement, exchange traded funds (ETFs) can help you get there.
Their key benefits – instant diversification, low cost, and easy access to virtually all investable markets – make them a useful addition to every portfolio.
Who are ETFs suitable for?
ETFs are ideal for pretty much all investor types. Investors with small starting capital will appreciate that they can build a diversified ETF portfolio with relatively low investment amounts. For instance, the SPDR S&P 500 ETF is priced at USD$378 at this time of writing, but holds 500 large-cap US stocks. It is significantly more expensive to buy all 500 individual stocks to form your own portfolio, compared to buying just a single ETF.
For investors who are not familiar with the intricacies of the financial markets, ETFs allow them to invest in the broader market. There is no need to spend time and effort studying price charts and market trends – an ETF portfolio makes for a simple set-and-forget portfolio that will grow over time.
More advanced investors might be well-served by the innovation that ETFs offer. An ETF can fill almost every investment niche. Apart from ETFs that replicate an index like the S&P 500, there are ETFs that track a certain asset class or market sector.
For example, Syfe’s Equity100 portfolio holds several sector ETFs, from healthcare to consumer staples. It also holds a tech-focused ETF (Invesco QQQ) and ETFs that track emerging and developed markets outside the US (iShares Core MSCI Emerging Markets ETF and iShares MSCI EAFE ETF respectively).
What are the returns?
Like stocks and other investments, the return on an ETF depends on capital gain. You profit when the share price of your ETF rises above its purchase price.
ETFs track a particular index and their aim is to generate a return that closely reflects the performance of that specific index. As such, ETFs are ideal for investors who wish to match the market’s returns over time.
This has historically been favourable. According to Goldman Sachs data, 10-year stock market returns have averaged 9.2% over the past 140 years. By capturing the market’s return at low cost, numerous studies have shown that passive funds like ETFs manage to outperform most active funds over the long term.
How to buy ETFs
The conventional way to buy ETFs is through a brokerage platform. When purchasing ETFs through a broker, take note that commission fees apply each time you buy or sell an ETF. You also incur more commission fees the more transactions you make. So if you’re building a diversified portfolio of several ETFs, you may end up paying a considerable amount in commission charges.
The alternative is to invest in ETFs via a digital wealth advisor like Syfe. For one, there are no investment minimums. You may choose to invest a lump sum or dollar cost average depending on your preference.
Moreover, there are no brokerage fees or transaction costs. This lowers your investment costs even further, which leaves you with higher returns.
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One effective ETF strategy to consider is a core satellite approach. The core typically consists of a globally diversified ETF portfolio to approximate an investment into the entire market.
The satellite is made up of smaller investments in particular sectors or trends. This could potentially supplement your core with higher returns if your chosen sector outperforms the market.