Page 40 - DIY Investor Magazine | Issue 37

Apr 2023 40 DIY Investor Magazine · SAVER > INVESTOR: WHAT DO ETFS INVEST IN? ETFs enable you to construct a diversified portfolio cheaply and easily, yet a recent survey by Opinium found that 50% of retail investors had never heard of them – writes Christian Leeming. When people hear the word ‘investing’, they often think of shares – or ‘equities’ – but they are just one of several asset classes that you should consider for your portfolio; ETFs enable you to construct a diversified portfolio of different asset types more cheaply and easily than ever. An asset class is a grouping of securities or investments that have similar characteristics and tend to behave the same way in particular market or economic conditions. Because asset classes have differing characteristics, when one is struggling, another may be delivering superior returns. Ideally, the poor returns from one asset type over a particular period will be more than offset by gains from another. By holding different asset classes in a portfolio, an investor can therefore aim to generate an acceptable overall return, with reduced volatility on the total money they have invested. ETFs of different strategies and asset classes are ideal to build a buy and hold portfolio adapted to your needs. There are five major asset classes to consider when building your ETF portfolio: CASH The most liquid asset, and the safest since it does not fluctuate with market pricing. However, returns are typically low and may be wiped out by inflation. BONDS Bonds are loans made by investors in return for a fixed income stream over a specific timeframe, and the return of the initial sum at the end of the period. Bond prices fluctuate day-to-day and break down further into government or corporate bonds with different risk/reward profiles. PROPERTY Commercial property, where an investor gets an income stream derived from rent, plus capital gains as buildings and land becomes more valuable. ETFs invest in collections of listed property companies, rather than directly into property. EQUITIES Traded shares of stock market listed companies can deliver income via dividends as well as capital gains as companies become more valuable. Over the long term, equities in developed markets have delivered the best returns, but at the cost of greater volatility. Equities can be divided by country, by sector, by size, or in many other different ways delivering different performance within an asset class. COMMODITIES Bulk goods such as oil and corn are traded on their future prices and offered in ETFs as mixed baskets. Precious metals, as an exception, may also be bought at spot price through Exchange Traded Commodities (ETCs). Commodities are generally used to increase diversification in a portfolio thereby lowering risk, although ETFs with commodity exposure are popular with short-term traders taking a view on the markets. DIVIDE AND CONQUER These major asset classes can be broken down into further sub-categories. For example, bonds can be divided into government bonds and corporate bonds. Equities can be divided by country, by sector, by affiliation to themes, by size, or in many other different ways. These subdivisions have their own characteristics of risk and reward and may respond differently to others in the same asset class over the economic cycle. AN ETF FOR EVERY ASSET CLASS In conclusion, ETFs are an excellent way to get exposure to these asset classes quickly and cost-effectively. There are a number of online selection tools to help you find the right ETFs for you – try ETF search from our friends at justETF.