ETF portfolios can be diversified based on investment objectives such as current income, capital growth, and risk mitigation. Different types of ETFs include those focused on dividend-paying stocks, growth stocks, risk mitigation, leveraged ETFs, industry and sector ETFs, national and international indices, and commodity ETFs. Combining investments in ETFs can produce unique and tailored investment portfolios.
Investing in Exchange Traded Funds (ETFs) can lead to some interesting portfolio configurations. The best ETF portfolios are typically diversified with an emphasis on investment objective. Current income, capital growth, and risk mitigation are types of investment goals that are addressed when building ETF portfolios. Combining investments in ETFs can produce unique and tailored investment portfolios.
Many ETFs are composed of a portfolio of financial assets. The configuration of ETF portfolios will determine performance under different market conditions. An ETF designed for current income will be composed of investments in dividend-paying stocks. These stocks can be purchased by the ETF based on the highest dividend yields or strongest dividend growth history. Market capitalization and liquidity can also be factors in stock selection.
The investor seeking capital appreciation may be interested in an ETF focused on growth stocks. Growing companies reinvest profits back into the company rather than paying dividends to shareholders. The investor could realize a capital gain through the increase in the value of the shares. Many different methods are used to value growth stocks, including fundamental and technical analysis techniques.
Risk mitigation techniques are designed into some ETFs. Portfolio diversification by investing in uncorrelated financial assets attempts to control volatility while providing a constant rate of return. These ETFs can be made up of stocks, bonds, commodities or currencies and are a combination of many different asset types. Many of these ETF portfolios are actively managed.
Highly leveraged ETFs are designed for short-term speculation on market price movements. Leveraged ETFs typically track major indices and can be long or short positions. Returns can be two or three times the normal payout, but potential losses are also magnified at these same levels. Because ETFs are traded like individual stocks, the short-term trader can use leveraged ETFs to swing trade index price fluctuations.
Many investors follow specific types of companies, products and services. The best ETF portfolios for these types of investors are industry and sector ETFs. These ETFs own a portfolio of stocks within a particular sector, providing a more diversified approach to sector investing. A company’s risk of failure is mitigated by investing in a basket of similar companies.
Leading market ETFs are available for national and international indices. The major indices track broad segments of the stock market, which generally represent general economic conditions in different countries. ETF portfolios that combine indices from various countries may be the best choice for the diversified investor. Foreign currency ETFs are also available individually as a basket of currencies.
Commodity ETFs provide financial security that is not correlated to the stock market. Uncorrelated assets should be a part of the diversified portfolio. During times of stock market decline, the commodities sector typically advances. Recent studies indicate that a portfolio composed of diversified investments in stocks, bonds and commodities provides consistent returns without excessive volatility swings.
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