Exchange-traded funds (ETFs) seem to have really captured the attention of many investors who are just looking to find a passive way to invest into the share market.
One of Australia's leading ETF providers is BetaShares, which provides some of the best ETF options on the ASX in my opinion, such as BETANASDAQ ETF UNITS (ASX: NDQ), BetaShares Global Agriculture ETF (ASX: FOOD) and Betashares Global Cybersecurity ETF (ASX: HACK).
Here are three reasons to like ETFs according to BetaShares:
Avoid the hassle of picking individual shares
Picking individual shares is notoriously difficult. If you manage to make six right picks out of ten then that's doing well! Of course, you hope your winners are bigger than your losers.
We are wired to naturally want to avoid danger and pain. That's why the losers in our portfolio hurt more than the winners.
ETFs allow you to avoid the large losers and also saves time on all the researching that you could have done. More time for family, earning money or whatever else you want to do.
Diversification
There's strength in diversification. In one share purchase you get lots of different companies in different industries. If there's a problem with telcos then only a small portion of your portfolio would be affected.
It also means that you don't miss out on growth sectors either. A simple SMSF portfolio may only contain the big banks and resource shares, but an ETF would also give you exposure to healthcare and tech shares.
Exposure to international markets
The ASX has a lot of quality businesses listed, but it is missing a huge amount of other companies listed in North America, Asia and Europe.
To directly invest in them takes a lot of effort, forms and brokerage costs. It's much easier to invest through an ETF and get that international exposure through one or a few ETF holdings.
One reason ETFs aren't great
Diversification is a good thing, but it means your returns are reliant upon the underlying holdings to do well. Yes, you get the winners but you also get the losers. If you invest in a tech ETF and the entire sector does badly then you lose. If it's a US-focused ETF and the American economy does badly then the ETF will do badly.
Foolish takeaway
I think ETFs are great and definitely can form part of a portfolio. Perhaps ETFs are all you need to hold – that would make things very simple. I think ETFs can be very useful to give exposure to certain industries or geographies that you don't have in your portfolio.
However, any winners in the portfolio are diluted. If Altium Limited (ASX: ALU) or Amazon doubles in value then the ETF you own will only benefit a small amount because those shares are a relatively small part of the ETF.
