Diversification of a portfolio is one of the main principles of investing. Diversification means that an investor must assign funds to several different investments to wide risk, rather than put all on a single stock or investment.
While many types of investments are there to pick from, an investor still requires a considerable amount of fund to build a diversified portfolio. This capital need can be a special challenge for young investors, as they may have low savings to invest. However, ETF (exchange-traded funds) makes it possible to create a diversified portfolio with comparatively low investment thresholds.
Here We Look at Five Common Types of ETFs.
1. Commodity Funds
It is crucial to know why you are interested in commodities, before investing in commodity ETFs. Traditionally, commodities have had a small price association with equities. Professionals recommend that strategic asset assigning accounts for 90% of a portfolio’s return. However, it’s not adequate to have stocks, bonds,cash, commodities and real estate in your portfolio. You must diversify within each of those asset classes and that’s where ETFs plays a big role. Investors can purchase a commodity ETF that tracks the cost variation of particular commodities like gold or oil. Previously it has a small association with stocks, but now it is highly associated. If your portfolio already holds equities, a straight commodity ETF perhaps become more sensible.
2. Equity Funds
Most ETFs follow equity indexes or sectors. Some index ETFs imitate an index in its sum, and others use agent sampling, which deviates somewhat by using futures, option and swap contracts, and the acquisition of stocks sometimes not found in the index. If this sampling becomes more aggressive, it can create tracking errors. More than 2% of a tracking error in the ETF is considered actively managed.
The ETFs proliferation offers investors with a cheap way to achieve diversification in their portfolios. Whether you wish to capture a certain portion of the world’s stocks, a wide sector or a niche market, there is an ETF available for that.
However, with the large options out there, you must initially determine your portfolio’s equity allocation and then, according to them, choose ETFs to meet your investment goals.
3. Fixed-Income Funds
Most financial experts recommend that you invest a part of your portfolio in fixed-income securities for instance bonds and bond ETFs. Since bonds tend to decrease a portfolio’s volatility, while also offering an additional source of income. Asset allocation will generally depend on what amount must go to equities, fixed income, and cash. Similarly, like equity funds, many bond funds are also available.
4. Specialty Funds
With the popularity of ETFs, varieties of funds come out to meet every possible investment strategy, much like what took place with mutual funds. Inverse funds that have a profit when an exact index does poorly, and leveraged funds that can double or triple the returns of an exact index by using leverage. You can still buy ETFs that do both. If you pick to dabble in leveraged or inverse ETFs, it is crucial to know the risks. Generally, they are highly volatile and variable as long-term investments.
5. Real Estate Funds
Income investors wishing a small sizzle with their steak,perhaps consider real estate investment trust (REIT) ETFs. Whether you pick a fund that invests in a particular type of real estate or one, which is broader,the biggest appeal of these funds is the fact they must expense 90% of their taxable income to shareholders. This makes them very appealing in terms of yield, in spite of the enhanced volatility compared to bonds. These funds are a great source of income, particularly when short-term interest rates and inflation are close to significant lows.