Securities of ETF exchange-traded funds are perfect for conservative investors, also from the point of view of forming a passive portfolio. There are two ways to use such funds: they can be used to form a portfolio (“diversification of diversification”) or to balance other investments with ETF securities. Let’s talk about the first option – a set of ETFs for the passive investor.
The top 5 things to know about ETF funds:
- ETFs are an effective investment tool with access to the stock, bond, and commodity markets.
- ETFs are a simple and convenient exchange-traded instrument. Any investor can perform a variety of operations with ETF funds, and specialized knowledge is not required.
- ETF is an instrument with minimum risks, with strict control of the management system, with multi-level protection against dishonest actions of a manager.
- ETF is an investment tool that allows you to create your own portfolio according to your goals and risk attitude. It does not require much time or the investment of solid initial capital.
- An ETF is a passive investment vehicle that shows, on average, higher returns than actively managed funds.
When selecting ETF funds, you need to consider:
- Purpose of investment (education of children, capital for retirement, purchase of real estate, etc.)
- Investment horizon (1-3 years, 5-10 years, 30 years, etc.)
- Admissible risks (if you are willing to take risks, then invest most of your money in ETFs of shares; if you are afraid of portfolio value falls, then invest most of your money in ETFs of bonds).
And never forget the basic rule of investing – diversification.
Use ETF funds that help you spread your funds between:
- stocks, bonds, commodities, and cash funds;
- currency assets;
- ETFs on indices of several countries.
How to Buy ETFs
U.S. Exchanges – a dollar option
On U.S. exchanges, the choice of ETFs is greater, but the investments will be dollar-denominated.
- Vanguard Total World Stock ETF (VT) – allows you to “buy” the global stock market. The ETF represents about 8,700 securities, including U.S. (58% of assets as of August 2021), other developed markets, as well as emerging markets. The key assets of the fund are U.S. stocks, where the stock market is the most developed. The technology sector accounts for 25% of assets. This is a certain risk due to the skew towards more volatile securities. However, none of the securities “weighs” more than 3% in the ETF.
- SPDR S&P Dividend ETF (SDY) – tracks the S&P High-Yield Dividend Aristocrats index. It includes the U.S. “dividend aristocrats” with the highest dividend yields (over 100). “Dividend aristocrats” in this case are companies that have increased their annual payouts for at least 20 consecutive years. Dividend yield: 2.8% per year.
- SPDR Gold Shares (GLD) – allows you to buy gold. The underlying asset is gold bullion. GLD securities move like spot gold prices.
- iShares Core US Aggregate Bond (AGG) invests in highly secure US government and corporate bonds. An extremely conservative instrument with low dollar yields. Compared with stocks and speculative bonds, AGG securities are much less volatile, the risk of default or bankruptcy of the issuer is close to zero, but the potential yield is lower.