I enjoy investing in the stock market and one way I make my investment journey easier is by investing in ETFs therefore my goal in my portfolio is to have more than 70% of my stock portfolio in ETFs.
Dividend ETFs
Personally, I like the dividend investing approach as it provides me with the opportunity to receive some cash without sacrificing my holdings. Therefore I invest primarily in Dividend ETFs as it provides me with stocks that fulfill my personal goals. When evaluating dividend ETFs one key thing that I focus on is the Compound annual growth rate (CAGR) of the dividends as well as the overall performance, therefore I am not only looking at the dividend yield of the ETFs.
Why? (Pros)
The first point is diversification, by investing in an ETF I immediately get diversified by the number of holdings (stocks) within that ETF, 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.
Another point is the passive nature of dividend ETF 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.
Finally, it deals with the fact that as an individual investor 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 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 and therefore saves me some time. By this, I remove any personal opinion or judgment I would have on an individual stock.
Why not? (Cons)
Sometimes ETFs can be too diversified and hold too many stocks while you would like a concentration of at most 100 stocks but there are some ETFs that hold more than 1000 companies, the question is would this be efficient as it may be too diversified and not focused on the main holdings and with this, I would like to say that by holding an ETF I am holding the winners and losers and will only be able to get the market average return depending on the given criteria. And in times that we have a more expensive market that means that I buy some stocks that may be overvalued according to my personal criteria as I have no choice.
Investing in ETFs still requires some type of research as not all ETFs are the same, it all depends on the benchmark or portfolio the ETF is tracking that is why as a starting point I like to look at the benchmark as well as the top 10 holdings. A lot of ETFs will show you the top holdings and how much they are making of the total portfolio, therefore some information on the individual holdings would be beneficial to know if the ETF fits my goal. Another thing worth considering in this situation is the overall performance throughout the years, as this will indicate how the ETF has been performing over time.
The final con would be the expense ratio because ETFs do most of the job for you this also means that they are making costs for you to be able to provide this fund for you to buy, Therefore the funds' issuer will charge what is known as an expense ratio, which will be a percentage of the fund that will be paid as an expense, normally these are not too high, however the lower the better, personally, I look for ETF’s that are charging below 0.5% this may seem quite high if you are reading from the U.S. but in Europe, I find that ETF’s are bit more expensive compared to the U.S. counterparts.
Conclusion In conclusion, I can say that personally the big advantages of holding ETFs definitely outweigh the disadvantages, and I chose to have most of my holdings in ETFs, even though I don’t necessarily hold the riskiest types of stocks, the passive nature and historical performances of ETF’s both provide enough arguments for me to invest in them, it gives me exposure to companies and sectors that I probably wouldn't have invested in. One thing to note is that since I mostly invest in dividend ETFs I find it very important to track how the dividends have grown over time within an ETF.
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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