ETFs, exchange-traded funds, are funds that trade on stock exchanges – just like the name spells out. They’re like the sexier, more flexible cousins of mutual funds. And ETFs make a great choice for building up wealth.
To start, every ETF holds a whole portfolio of securities, just like a mutual fund. You can find ETFs that invest in practically anything you can think of:
- Emerging markets
- Single countries
- Global regions
- Market sectors
- Commodities (like gold, gas & oil, or precious metals)
- Leveraged shares (more exotic investments like options and futures)
No matter what kind of investments you want to add to your portfolio, there’s an ETF that covers it.
Lower Risk, Great Rewards
With ETFs, you can invest in any specific market area you want without the extra risk that comes with buying single securities.
For example, if you buy stock in one company, you face all the general risks of the market PLUS risk specific to that company. It could go bankrupt, the CEO could quit, there could be an accounting scandal, a product could end up hurting people, and so much more could go wrong.
But when that stock is just one of hundreds in an ETF, your portfolio won’t tank if that company goes under.
How ETFs Differ from Mutual Funds
ETFs hold portfolios of investments just like mutual funds, but that’s where the similarity ends. Unlike mutual funds, ETFs:
- trade on stock exchanges, unlike mutual funds that are bought directly from the mutual fund company
- don’t have minimum purchase requirements, while most mutual funds require you to start with anywhere from $500 to $5,000
- display their holdings every day so you know exactly what you’re buying, unlike mutual funds that generally report their holdings quarterly
- usually have lower fees than mutual funds
- create fewer “taxable events” like capital gains while you hold them, due to the way they’re structured
Bottom line: ETFs offer lower fees, fewer tax hits, and more transparency than mutual funds.
Designing Your ETF Portfolio
With ETFs, you can easily create an affordable investment portfolio. In fact, with just a few strategically selected ETFs, you can build a well-diversified set of core holdings, covering virtually every corner of the market. For far less than the cost of holding individual stocks, your ETFs can give you exposure to all the major equity classes: every size of market capitalization and every market sector.
You can balance your stock holdings with a few shares of fixed-income ETFs. These add in the benefit of steady income, just like you’d get by holding individual bonds or bond funds, but with much more trading flexibility. And for an extra layer of portfolio security, you can branch out into global ETFs, which can help protect against downturns specific to the U.S. markets (investments in other countries could rally when the U.S. markets are down).
Need help getting started? Contact me to set up a coaching session and we’ll go through the steps together.