A Diversification Cheat Code: ETFs

In a prior article, I discussed the importance of diversification and how it's used as damage control for investors. However, diversifying your entire portfolio into equal parts of anywhere from 10-20 (or more) stocks is exhausting work and can take hours daily to evaluate your positions. With ETFs (Exchange Traded Fund), investors can put their money in hundreds of companies, with just one purchase, you may be wondering... How? Well let's dive in!

So... What is an ETF?

ETFs are a collection of many different companies publicly trading on the stock market, but available on an exchange just like a stock. For example, arguably the most famous ETF is Vanguard S&P 500 (VOO). As one could assume from its namesake, VOO tracks the S&P Index which prior to ETFs was not possible to invest in all at once. Thus, VOO follows the companies that allocates the ETF 1:1 with the Moody index. So with a purchase of 1 share in VOO, you have a small ownership in all 500 companies in the S&P.

The Pros and a Con

The benefits of ETFs are obvious, diversification coming easily and all the heavy lifting done for you. However, almost all ETFs come with what is called an Expense Ratio; which is a minimal fee that is automatically taken from your positions profit and/or dividend yield. However, this is the only downside, and when compared to the extensive fee hedge funds and brokers charge, it equates to almost nothing.

Types of ETFs

ETFs are meant for diversification, but they expand beyond just tracking an index. Other things ETFs may track could be any of the following:

• Stock ETFs (Tracking a group of company stocks)

• Bond ETFs (Invest in government or corporate bonds)

• Sector or Thematic ETFs (Focus on industries like tech, healthcare, or trends like clean energy)

• International ETFs (Give exposure to markets outside of U.S)

• Specialty ETFs (Could include, growth stocks, dividend stocks, etc.)

All in all, ETFs are a key tool for diversification in investing with little to no downside. If you'd like to read about the two ETFs that are helping people be financially free in their 40s, consider upgrading to Pro below.