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When do ETFs have a part to play in portfolios?

Exchange-traded funds (ETFs) have been around for over 20 years now and are deemed a worthy competitor to the more traditional mutual funds. There are roughly 4,500 ETFs globally, totalling $2,871 billion in assets.1

Investors choose ETFs because they are looking for diversified market exposure. These investors are not looking to place a bet on an individual stock holding. Investors who choose to invest in an individual stock understand the risks and opportunities of doing so. This is all about your tolerance to risk and the flexibility of your capital.

Where do ETFs play a part in portfolios?

ETFs have a part to play in both strategic and tactical asset allocation. Strategic investors use ETFs as the building blocks of their portfolio. In recent years the ETF universe has grown in terms of breadth, depth and granularity. The liquidity they offer allows ETFs to be used in a variety of portfolio management strategies. ETFs are a flexible and cost efficient way to gain market exposure.

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What are the key considerations when selecting an ETF?

When selecting ETFs you need to look at the benchmark it is tracking; two benchmarks with the same label can deliver different returns. Investors should also look at the efficiency of the ETF, so the fees, the tracking difference and the tracking error (volatility). The final thing to consider is the proportion of a single stock or a few stocks within an ETF, if you are looking for diversified market exposure you want to ensure you are getting it.

How to access ETFs?

In order to access ETFs you would need to go through a broker or asset manager. Most would charge some sort of platform fee in addition to the ETF fee. The level of support an investor receives varies hugely; from choosing the ETFs yourself to having your portfolio managed for you. Moneyfarm falls in the latter category and offers a portfolio built around your investor profile. It need not be complicated, with Moneyfarm it takes just 7 minutes to sign up and then all you have to do is transfer your money.

1 ETFGI.com

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