I think that exchange-traded funds (ETFs) are a great way for people to invest because of how easy it is for people to do it.
ETFs can also make it so normal people’s portfolios can outperform the professionals (after fees).
How? Here are my reasons:
Typically low fees
A lot of the index-based ETFs out there have very low management fees.
You don’t want to be paying much in management fees because all that does is line the pockets of the manager.
Some managers are worth it because of their ability to outperform their target benchmark. However, that’s not the case with lots of managers. So, you can choose an investment that may be able to outperform the professionals that charge 1% or more, with ETFs that might cost a fraction of that.
Remember, fees are reducing your wealth.
Why not just match the share market’s return, which is usually a great wealth building rate, and make it easy?
Usually good diversification
Buying an ETF means that you are investing in an entire portfolio. If you buy Commonwealth Bank of Australia (ASX: CBA) shares then you just invested in one company.
However, picking an investment like BetaShares Australia 200 ETF (ASX: A200) or Vanguard US Total Market Shares Index ETF (ASX: VTS) means you are invested in hundreds or even thousands of businesses in just one choice. That’s great diversification to me.
How much sector industry diversification you get depends on what ETF you choose to buy.
More time for you
Doing the ‘work’ to find quality individual shares to buy can take quite a long time.
If that’s what you want to do, and you’re good at it, then great.
But, most people do not have the time, skills, temperament or patience to invest in individual shares.
Instead, picking an ETF can take just a few minutes compared to hours for the individual share.
With all that extra time, you can spend it either doing things you like doing (eg spending time with family) or use it to earn more money (which you could then invest).
ETFs are so good for so many reasons in my opinion.