4 reasons to invest in ETFs
Author: Christy Bieber
Source: The Motley Fool
I would love to become a millionaire before retirement thanks to my investments. And there's one particular type of investment I'm hoping will help leave me with a seven-figure nest egg: exchange-traded funds (ETFs).
In a crowded field of different assets, ETFs make up the bulk of my portfolio for four simple reasons. Here they are.
1. Fees are low
Many ETFs are passively managed, and investments are chosen with the goal of mirroring the performance of a financial index.
With passive management comes lower fees. I know fees can take a huge bite out of cumulative returns, especially over many decades of retirement investing. Since my goal is to choose the lowest-cost investments available, ETFs fit the bill.
2. Researching ETFs is easy
I'm not a person who is interested in spending a ton of time researching stocks. While I know you can beat the market and earn far better returns if you're good at picking individual companies to invest in, I'm also aware that that wouldn't be one of my strong suits.
Since I don't want to spend the time and I don't feel I have the knowledge to make smart stock picks, I need an investment that's easy to research. ETFs are perfect.
All I have to do is decide what kind of assets I want exposure to -- such as large companies, real estate, or the stock market as a whole -- and search for ETFs that invest in them. I check the fees and past performance of each of the relevant ETFs, and can select one within a few minutes.
3. Diversification is simple
Diversification is key to a healthy portfolio. Since ETFs invest your money in many different companies, such as every stock in the S&P 500, you own a very small stake in tons of different businesses.
Diversification can thus happen instantly and effortlessly. That's true even if you pick a niche ETF, such as one designed to give you exposure to the pharmaceuticals market. In these cases, buying an ETF will allow you to own a small piece of companies with different focuses.
It's a lot more complicated to make sure you have the right balance of investments if you're buying individual stocks, since you need to assess each one's role in your portfolio to avoid investing too heavily in any one particular company or industry.
4. The risks of investing are reduced
Because ETFs invest in so many different companies, the risk of investing is reduced compared with that of buying individual stocks. While one company could easily see its stock crash due to poor performance or new regulations, ETFs are less volatile because so many different companies would have to see big declines in share price for their prices to move a lot.
Of course, the converse is true: The potential rewards of investing in ETFs are reduced as well. If you're willing to put in the time and have the interest and know-how, you can experience higher returns by buying individual stocks. But since that's not my situation, the benefits of ETFs have made them the clear and unequivocal best choice for me. I invest in them consistently -- and over time, based on historic returns, I'm confident that ETFs could have the potential to make me a millionaire.