4 Reasons to choose ETFs for your investment portfolio
Warren Buffett believes that ETFs are one of the best and most cost-effective ways of investing for retail investors. And Inukshuk Capital Management invests solely with ETFs for their clients because of years of research, evidence and experience in the field.
If these heavy-hitters in the investment space prefer ETFs, it might pay well to get a good grip on what they are and why you should choose ETFs for your investment portfolio. Let’s unpack it.
What is an ETF?
ETFs, or Exchange Traded Funds, are a composite of securities that make up an index. Meaning, they track certain indexes and offer returns based on their performance. Initially ETFs were invented to give institutions exposure to large markets. But they have evolved to give people at large exposure to specific areas of the stock and bond market. In the 90s, ETFs were the “new kid on the block” with Mutual Funds winning all the popularity contests. However today, ETFs have become a mainstream retail and institutional investment product.
If you’ve got more questions about different investment options for your portfolio, have a listen to this podcast episode, or read about 4 Investment vehicles you should consider.
Why choose ETFs?
Patrick Keeley, President at Inukshuk Capital Management, gives a convincing, evidence-backed case for ETFs in this podcast episode. Here’s Patrick’s 4 reasons you should choose ETFs for your portfolio:
ETFs give you broad exposure to the market. You can, for example, buy an ETF that tracks the S&P 500 giving you exposure to 500 large companies listed on the exchange in the USA. While this is a more generic ETF, you can get very specific too. You can choose to invest in niche markets that interest you, like technology or pet accessories.
From a practical standpoint, if you want to invest in stocks across the S&P 500 without using an ETF, it would be very time consuming and a logistical nightmare to buy all those stocks yourself. With an ETF you have instant and effortless access to those same stocks.
One of the biggest draw cards of an ETF is that it is both cost effective and tax efficient. Fees on ETFs rarely go above 1% whereas mutual funds are around 2%. For the more “vanilla” ETFs your fees could be lower than a 10th of 1% and the more exotic or specific the ETF, the higher the fees, but most likely, never more than that 1% threshold.
A recent study shows that the large majority of fund managers (79% to be exact) underperformed markets, like the S&P 500, last year. When looking at the probabilities, the indexes are the gold standards themselves. They outperform almost every portfolio manager in the world.
All in all, buying ETFs makes sound investment sense. Whether you choose to do it yourself and buy ETFs in industries or themes you’re interested in, or if you rely on robo-advisors, you can get yourself great exposure on the stock and bond markets. Remember to exercise caution when placing your investments in the hands of an algorithm – make sure you’ve done your own research first. And if you’ve built up substantial wealth and are weary of managing your portfolio on your own it might be time to get a professional involved. You can read our blog about choosing the right fund manager here.