One of the greatest benefits of exchange traded funds (ETFs) is the diversification these funds provide, at a very low management expense ratio (MER) or fee. Those looking to build well-diversified portfolios can incur a pretty hefty cost of acquiring these positions and balancing them, as well as a significant time investment to pick and choose the best companies in the sectors one wants to target.
Thus, ETFs are a great choice for passive or active investors alike, given the savings in terms of time and money one receives from most ETFs.
The Vanguard Total Stock Market Index ETF (NYSE:VTI) is my preferable choice for investors looking to get broad exposure to the entire stock market. This ETF tracks the whole market, with investments spanning small mid and large cap companies.
Thus, this ETF doesn’t have some of the concentration risk other funds have that track specific indices. In many cases, a few companies make up a massive percentage of these ETFs, so investors end up overly exposed to just a few stocks when they think they’re buying diversification.
I think it’s important for investors interested in an ETF to look under the hood and look at the weightings of the top stocks in a given ETF before investing. If the given ETF is heavily concentrated in a few stocks, I would suggest either investing in those stocks directly or avoiding the ETF. The primary reason investors should buy ETFs is diversification, so keep this top of mind at all times.
Invest wisely, my friends.
