Is it safe to invest in only one ETF?
Investing in an ETF that tracks a financial services index gives you ownership in a basket of financial stocks versus a single financial company. As the old cliché goes, you do not want to put all your eggs into one basket. An ETF can guard against volatility (up to a point) if some stocks within the ETF fall.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification. But the number of ETFs is not what you should be looking at.
Single-stock leveraged ETFs can be useful assets for traders. These assets have more volatility, and traders try to capitalize on short-term price movements as they seek profits. Gains and losses both get magnified. This type of atmosphere can help traders realize more gains, of course, but the opposite is also true.
ETFs make a great pick for many investors who are starting out as well as for those who simply don't want to do all the legwork required to own individual stocks. Though it's possible to find the big winners among individual stocks, you have strong odds of doing well consistently with ETFs.
ETFs can be safe investments if used correctly, offering diversification and flexibility. Indexed ETFs, tracking specific indexes like the S&P 500, are generally safe and tend to gain value over time. Leveraged ETFs can be used to amplify returns, but they can be riskier due to increased volatility.
The majority of individual investors should, however, seek to hold 5 to 10 ETFs that are diverse in terms of asset classes, regions, and other factors. Investors can diversify their investment portfolio across several industries and asset classes while maintaining simplicity by buying 5 to 10 ETFs.
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
A single-stock exchange-traded fund allows you to leverage a single company, and potentially earn a significantly higher return. Sam Taube writes about investing for NerdWallet. He has covered investing and financial news since earning his economics degree from the University of Maryland in 2016.
While an ETF sounds like a simple “single” investment, it comes with enhanced risks; including lack of diversification, daily resets, leveraged structure, active trading needs, and compounding losses.
Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation.
Why not to buy an ETF?
Market risk
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.
For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.
- Vanguard S&P 500 ETF (VOO -0.07%) ...
- Vanguard High Dividend Yield ETF (VYM 0.24%) ...
- Vanguard Real Estate ETF (VNQ 0.19%) ...
- iShares Core S&P Total U.S. Stock Market ETF (ITOT 0.06%) ...
- Consumer Staples Select Sector SPDR Fund (XLP 0.76%)
If Vanguard ever did go bankrupt, the funds would not be affected and would simply hire another firm to provide these services.
| Symbol | Name | 5-Year Return |
|---|---|---|
| SOXX | iShares Semiconductor ETF | 25.18% |
| FBGX | UBS AG FI Enhanced Large Cap Growth ETN | 23.78% |
| ITB | iShares U.S. Home Construction ETF | 23.56% |
| SOXL | Direxion Daily Semiconductor Bull 3x Shares | 22.55% |
SPY, VOO and IVV are among the most popular S&P 500 ETFs. These three S&P 500 ETFs are quite similar, but may sometimes diverge in terms of costs or daily returns. Investors generally only need one S&P 500 ETF.
Keeping it simple. One option you can consider would be using two ETFs to help provide a balanced, diversified portfolio of stocks and bonds: A total world stock market ETF. A total bond market ETF.
The largest Aggressive ETF is the iShares Core Aggressive Allocation ETF AOA with $1.80B in assets. In the last trailing year, the best-performing Aggressive ETF was AOA at 12.08%. The most recent ETF launched in the Aggressive space was the iShares ESG Aware Aggressive Allocation ETF EAOA on 06/12/20.
"A newer investor with a modest portfolio may like the ease at which to acquire ETFs (trades like an equity) and the low-cost aspect of the investment. ETFs can provide an easy way to be diversified and as such, the investor may want to have 75% or more of the portfolio in ETFs."
How often should I invest in an ETF?
The best time to buy ETFs is at regular intervals throughout your lifetime. ETFs are like savings accounts from back when savings accounts actually paid you interest. Think back to a time when you (or your parents!) used to invest in your future by putting money into a savings account.
Mutual funds and ETFs are not guaranteed or insured by the FDIC or any other government agency—even if you buy through a bank and the fund carries the bank's name. You can lose money investing in mutual funds or ETFs.
You may be able to find an index mutual fund with lower costs than a comparable ETF. Similar ETFs are thinly traded. As we covered earlier, infrequently traded ETFs could have wide bid/ask spreads, meaning the cost of trading shares of the ETF could be high.
ETFs offer numerous advantages including diversification, liquidity, and lower expenses compared to many mutual funds. They can also help minimize capital gains taxes. But these benefits can be offset by some downsides that include potentially lower returns with higher intraday volatility.
ETFs are less risky than individual stocks because they are diversified funds. Their investors also benefit from very low fees.
