Portfolio diversification is one of the pit principles of investing. Diversification means that an investor should allocate capital to a number of different investments to spread out peril, rather than put everything down on a single stock or investment.
While there are numerous types of investments to settle upon from, an investor still needs a substantial amount of capital to build a diversified portfolio. This capital demand can be a particular challenge for young investors, as they may have minimal savings to invest. However, exchange-traded funds (ETFs) rectify it possible to have a diversified portfolio with relatively low investment thresholds.
ETFs also have a number of other highlights that make them ideal investment vehicles for the young investor. We will look at five of those in this article.
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- Variety of ETFs
The first ETFs, which were introduced in the late 1980s and early 1990s, were somewhat plain-vanilla products that tracked equity indexes such as the Standard & Poor’s 500 Index (S&P 500) and the Dow Jones Industrial Ordinarily. Since then, the range of available ETFs has exploded to include practically every asset class – stocks, links, real estate, commodities, currencies and international investments – along with every sector imaginable and many position areas, as well. Competition among ETF issuers has resulted in the introduction of ETFs that are very specific in focus, so teenaged investors can find specific ETFs that track particular markets or segments that may be particularly appealing to them. There are also a tons of inverse ETFs, which trade in the opposite direction to an asset or market, and leveraged ETFs that magnify follows two- or three-fold.
As of mid-2018, there were more than 1,800 U.S.-based ETFs, according to observations from research and consultancy firm ETFGI. For young investors, this extensive range of available ETFs offers a off the target variety of investment choices that are not available with index funds. The range of ETFs also means that an investor can develop a diversified portfolio with a lower outlay of capital than would have been required in the past.
Take into account the case of a young investor who has $2,500 to invest. Let’s assume that this investor is a keen student of the financial markets and has some well-defined judges on specific investments. She is positive on the U.S. equity market and would like this to be her core investment position. But she would also allied to to take a small position to back her other views – bullish on gold and bearish on the Japanese yen. While such a portfolio resolution have required a much higher outlay of capital in the past (especially before the advent of commodity and currency ETFs), she can now found a portfolio incorporating all of her views through the use of ETFs. For example, this investor could invest $1,500 into the Canon & Poor’s Depositary Receipts (SPDRs), and invest $500, each, in a gold ETF and short-sell a Japanese yen ETF.
2. Liquidity of ETFs
The details that most ETFs are very liquid and can be traded throughout the day is a major advantage over index mutual means, which are priced only at the end of the business day. This becomes an especially critical differentiating factor for the young investor, who may have a weakness for to exit a losing investment immediately in order to preserve limited capital. The liquidity feature of ETFs also allots investors the ability to use them for intraday trading, similar to stocks. (For more, see: ETFs vs. Mutual Funds: Which is Think twice for Young Investors?)
3. Low Fees of ETFs
ETFs generally have lower expense ratios than mutual pelfs. Additionally, although they are bought and sold like stocks, many
4. Investment Management Choice with ETFs
ETFs entitle investors to manage their investments in the style of their choice – passive, active or somewhere in between. Passive managing, or indexing, simply involves investing in one or more market indexes, while active management entails a more hands-on movement and the selection of specific stocks or sectors in a bid to “beat the market.”
Young investors who are not altogether familiar with the intricacies of the fiscal markets would be well-served by using a passive management approach initially, and gradually moving to a more active language as their investing knowledge increases. Sector ETFs enable investors to take bullish or bearish positions in specified sectors, or markets, while inverse ETFs and leveraged ETFs make it possible to incorporate advanced portfolio direction strategies.
Though the majority of ETFs are passively managed, just tracking an index,
5. Keeping Up with Trends via ETFs
One of the boss reasons for the rapid growth of ETFs is that their issuers have been at the leading edge in terms of advancing new and innovative products. ETF issuers have generally responded rapidly to demand for products in hot sectors. For example, numerous commodity ETFs were began during the commodity boom of 2003-07. Some of these ETFs tracked broad commodity baskets, while others lose sight of specific commodities such as crude oil and gold.
The dynamism and innovation displayed by ETF issuers is another feature that is seemly to appeal to young investors. As new investment trends get underway and demand surfaces for even newer investment products, there on undoubtedly be ETFs introduced to meet this demand.
The Bottom Line
Young investors who are not altogether familiar with the intricacies of the economic markets would be well-served by trading an ETF that tracks the broader market. Sector ETFs enable investors to run for bullish or bearish positions in specific sectors, while inverse ETFs and leveraged ETFs make it possible to blend advanced portfolio management strategies. Some of the other characteristics of ETFs that make them ideal investment carriers for young investors include liquidity, low fees, investment management choice and innovation.
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