ETFs (Exchange Traded Funds) are investment funds designed to track an index, sector, commodity or asset class. Like individual stocks, ETFs trade on the stock market just like individual shares do.
Diversifying your portfolio with flexible investments such as bonds is an excellent way to diversify and mitigate risk, so learn more about how these flexible investments work and why they may be an appropriate match for your clients’ financial goals and risk tolerances.
Diversification
ETFs offer an inexpensive way to gain exposure to various asset classes and geographic regions. Trading similarly to stocks, ETFs can make use of market fluctuations by continuously adjusting their prices throughout the day to reflect changing prices.
Diversification is an important way to lower risk when investing in the stock market, as it helps spread your bets among multiple investments and reduce risk. Although diversification cannot guarantee against loss, taking the time and care to research options could reduce your risk while increasing potential return.
Financial experts generally advocate diversifying both within and between asset classes. If you own stocks, for instance, diversifying between large-cap and small-cap companies as well as foreign and domestic stocks would be advantageous. Diversifying by industry could also prove worthwhile since stocks from different industries often offer distinct returns and risks profiles.
Bond investments follow a similar strategy; choosing short and long-term bonds from federal, state and local governments as well as corporations is an effective way to reduce volatility on the stock market.
Investors can increase diversification within an asset class by adding ETFs that target specific factors to their portfolios, for instance incorporating an ETF that targets value, quality and momentum factors to a traditional VT fund can add another layer of diversification at low cost.
Flexibility
ETFs can be an easy, cost-effective way to diversify your portfolio, being easy to buy and sell with low fees and easy trading during the day. But they shouldn’t be treated as one-size-fits-all investments; be sure to evaluate each ETF carefully against your goals, risk tolerance and time horizon before investing. Your Edward Jones financial professional can offer more information on benefits and risks related to ETFs so you can choose those best suited for you.
Occupying much of the spotlight around ETFs has been their rise as passive investments; however, active strategies have seen significant success as well. International ETFs experienced more than double inflows between 2020-2021!
ETFs offer another great advantage by making it easier to diversify within industries or any horizontals (such as geographic regions). While investing across broad market verticals such as stocks or bonds may require considerable money and effort, ETFs make the task more manageable by tracking collections of individual securities.
ETFs offer investors an innovative solution when rapid rebalancing is required, such as when inflows or outflows occur, outlining rapid reallocation strategies or reallocation changes require liquid vehicles. ETFs provide investors with an ability to quickly adjust their allocation quickly in response to changing circumstances, including rapid inflow/outflow/reallocation events.
Taxes
ETFs may provide taxable capital gains that have tax implications. This typically happens when fund managers make adjustments to match up underlying assets with their benchmark performance or an exchange-traded bond fund distributes taxable interest income. Brokerage commissions are charged when purchasing and selling ETF shares.
Consider how an ETF is managed, its expense ratio and performance history when evaluating one. A lower expense ratio can help minimize how much of your investment goes toward administrative costs; also compare its holdings against others in your portfolio to assess whether it provides enough diversification.
ETFs offer an effective way to diversify your portfolio without investing directly in individual stocks, but it is important to remember that their underlying investments may still be subject to market fluctuations and loss risks. Speak to a financial professional for more advice about which ETF would best meet your risk tolerance and investing goals.
Investing
ETFs offer an effective way to diversify your portfolio without investing directly in stocks or bonds, but before making your decision it is crucial that you discuss this option with a financial professional to assess both risk tolerance and goals before taking a final step.
Diversification can help cushion market fluctuations by spreading risk across a wide variety of industries, companies and countries – this is one of the reasons many investors choose ETFs as a form of diversification.
ETFs offer many cost-cutting advantages over actively managed funds, particularly passive ones with lower expense ratios due to simply following an index rather than trying to outstrip it. Furthermore, some ETFs offer dividend payments and DRIPs, further increasing your yield.
To get started with ETFs, it’s necessary to open a brokerage account with Edward Jones. Once done, ETFs can be purchased by entering their ticker symbol and specifying how many shares should be bought.
ETFs can be traded throughout the day on exchange, and you can buy or sell them based on your price targets. Due to how they’re constructed, however, ETFs may experience more market price fluctuation than their underlying assets and thus their market price may fluctuate more often than its net asset value at any given moment.
