One of the major advantages of an exchange traded fund is the ability for investors to gain instant diversified exposure, writes State Street Global Advisors’ Meaghan Victor.
With one trade, ETFs can provide investors with the easiest way to achieve instant access to a broad base of companies and stock markets across different industries and even countries.
The hunt for diversification
Without a doubt, diversification has been a driving force behind the massive adoption of ETFs both in Australia and abroad.
In fact, it could be said that in the age of the ETF, well-informed investors are learning what institutional investors have known all along. Asset allocation, not security selecting, is the key to achieving long-term investment goals.
Diversification can help to reduce investment risk and lead to smoother investment returns by providing broad, and even cross-market, exposure to different stocks or sectors.
ETFs are a cost-effective way for investors to gain diversified exposure that is still tailored to their investment needs. But how can investors ensure that they are taking full advantage of the benefit of diversification, so that their long-term investment objectives are being met?
Well, it turns out that another key benefit of ETFs – transparency – goes hand in hand with diversification, to equip investors with the tools they need to help craft a properly diversified portfolio.
The role of transparency in achieving diversification
Unlike other investment vehicles such as actively managed funds or exchange traded managed funds, ETFs allow investors to identify exactly which securities their fund holds at any given time.
ETFs provide the daily publication of full portfolio disclosures, giving investors a crystal-clear understanding of every stock or sector they are invested in.
Put simply, ETFs allow investors to look under the hood at any point to find out exactly where their investments are.
Transparency effectively gives investors the information they need to make informed and smart investment decisions, as well as the ability to co-ordinate their ETF portfolio with other investments.
For investors chasing portfolio diversification, transparency offers two key benefits.
Firstly, you know exactly what you are holding in your ETF. By its nature, diversification can lead to investors holding securities across a broad spectrum of industries and markets.
While this brings many advantages, investors also run the risk of losing track of their holdings as the structure of their investment could become more complicated.
With the advantage of transparency, ETF investors can keep a watchful eye on exactly what they are holding and where they have invested, whether it’s securities in global real estate or the entire S&P/ASX 200.
Rather than creating complexity in the hunt for diversification, transparency can keep a diversified portfolio simple, which allows investors to stay firmly on track to achieving their investment goals.
Secondly, transparency is key to helping investors ensure that the stock positions they hold align with the fund’s stated investment strategy.
For investors seeking diversification, the risk that they could lose track of what they are paying for can be a constant source of concern.
Through an ETF’s transparency, investors can monitor and check that they are paying the correct fees for the exposure they are receiving. This helps to safeguard investors against unwanted or hidden costs.
Diversification can help reduce risks and achieve smooth investment returns by casting a wide net across asset classes, equity market capitalisations, styles and sectors.
The added benefit of transparency through ETFs can then enable investors to take charge of their investment goals and ensure they are reaping the full benefits of a diversified portfolio.
For investors on the hunt for instant diversification, ETFs are a natural choice.
With the added advantage of transparency, investors can keep their portfolio diversification simple and stay on course to achieving their investment goals.
Meaghan Victor is head of SPDR ETFs, Australia at State Street Global Advisors.
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