Exchange-traded funds (ETFs) have become increasingly popular in recent years as a way for investors to gain diversified exposure to a particular market, sector, or specific benchmark. An exchange-traded fund is represented as a stock in the stock market so by holding this specific stock you are holding a basket of stocks that correspond to an index (portfolio benchmark) that it is tracking.
What are the best reasons to invest in ETFs?
Diversification: ETFs can provide investors with immediate exposure to various benchmarks for stock selection. This spreads the risk across different investments and reduces the overall volatility of a portfolio, so by investing in an ETF I invest in a basket of stocks in one go which gives me a less specific risk to one company and more of a market risk overall.
Low cost: ETFs typically have low expense ratios for the piece of mind they provide and especially considering the automation provided. Some have very low ongoing charges of 0.07% per year, which is not much for the benefits provided. This can help increase returns over time and make them accessible to various investors.
Flexibility: ETFs offer a wide range of investment options, from broad-based index funds to niche sector funds. This allows investors to tailor their portfolios to their specific investment goals and the risk tolerance they would like to have in their portfolios.
Passive: Another point is the passive nature of ETFs I don't need to investigate and keep up with the financials of all the companies within the ETF, therefore, less research is required and time can be spent elsewhere as I am holding a basket of stocks. And the passive nature means that in case a company is not attractive anymore by its benchmark criteria the holding gets thrown out of the ETF. I may not necessarily know what I am doing when picking stocks and I can leave this decision to the ETF, it deals with the fact that I do not need to make a judgment about whether a stock is good or not based on my own analyses which I may be wrong in, so by investing in ETF’s I just try to get the overall market return according to the index/ portfolio.
Automated reinvestments: ETFs are structured in such a way that they may be beneficial in terms of reinvestments as some ETFs are accumulating, which means that the dividend distributions are automatically reinvested and therefore do not need to be reinvested manually.
Overall, ETFs can be a great investment option for those looking for diversification, low cost, flexibility, passiveness, and automated reinvestments.
Disclaimer: I am not a financial advisor, this blog is centered around my opinion and should not be viewed as legal, professional, or financial advice
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