Using an exchange-traded fund (ETF) in your portfolio can serve a variety of purpose. Apart from the obvious benefits of choosing ETFs over mutual funds, there are also some added benefits that you must enjoy when you know the different types of ETFs that you can put in your portfolio.
Most ETFs track stock indices and sectors. There are some index ETFs that imitate an index as a whole, while others use representative samples that deviate slightly with the use of futures, swaps, and options.
The rapid growth of ETFs numbers offers investors a cheap way to achieve diversification in their portfolios.
There are ETFs for almost any sector, niche, industry, or particular stock. You can invest in ETFs that track small-, mid-, and large-cap stocks.
And because of the sheer number of options you have, you need to determine first your portfolio’s equity allocation. Afterwards, depending on those decisions, you can select ETFs to meet your investment goals.
If you ask for the advice of many professionals and experts, they would recommend you to invest a part of your portfolio in fixed-income securities, including bonds and bond ETFs.
The reason behind this is that bonds usually mitigates a portfolio’s volatility. Not only that, bond investments can provide a steady stream of income.
The question you should answer, then, will be about the percentages in which you will invest in bonds and equities.
Then there are also commodity funds. However, before you invest in commodity funds, you should also understand the reason why you are investing in commodities to begin with.
Commodities have had little price correlation with stocks. According to experts, strategic asset allocation makes up 90% of a portfolio’s return.
On the other hand, it’s not enough to invest in stocks, cash, bonds, and commodities. The key is to also diversify within those asset classes. This is where ETFs come into play.
Investors can purchase commodity ETFs that follow price changes in specific commodities like oil or gold. You can also invest in commodity stock ETFs, which invest in the stocks of commodity-related companies.
The world’s currencies markets are becoming more and more volatile. At the same time, the US dollar’s position as the world’s reserve currency is starting to get shaky.
As a result, investors are starting to seek protections for the value of their dollar-denominated investments. They are in search of a hedge against a weakening dollar.
One of their choices is to invest in the stocks of foreign companies, or even try foreign stock ETFs. On the other hand, this won’t give you asset class diversification since foreign stocks are typically correlated with US stocks.
A better choice would be to invest in foreign currency exchange traded funds. It doesn’t matter whether it’s a single currency or a broader focused basket.
The goal is to protect your portfolio from a weakening greenback.
Meanwhile, if the dollar is strengthening and you already own foreign stocks, you may protect the value of your holding by shorting the currency ETF.