Why would an investor pick one stock, when he or she could instead pick 75 in an exchange traded fund (ETF)? Beats us.
Sector investing has become the norm with the advent of the mutual fund and ETFs.
While some stocks might outperform an ETF, you didn’t know this would be the case when you bought the stock. It can be a tough call, and ETFs take the difficulty in choosing out of the equation.
Take a look at the technology sector, for example. Who are you going to pick? How do know who the winners are and who the dogs will be?
As an example, for a time, Google (GOOG) and Yahoo (YHOO) were performing differently. Choosing one or the other might have been a time-consuming task for an investor doing research on both. But several technology ETFs offer exposure to both these companies and many others.
Of course, while any basket of stocks limits the downside protection, it can also limit the upside gain, says ETF Guide. As an investor you have to ask which is more important: the peace of mind knowing you are protected or the tremendous possible gain at the price of your sanity.
Take this latest market situation, where the financial markets have unraveled many other areas of the stock market. The amount of agony any one investor has felt may only be the beginning, so knowing your portfolio is spread across the spectrum can help you sleep better at night, if you are invested in sector ETFs.