Exchange traded funds (ETFs) are swiftly moving into “household name” territory, but not everyone believes the hype. For those skeptics, the remedy is often just a little education.
ETFs provide access to a segment of the market and helps in constructing and managing a diversified portfolio, Roger Nusbaum for The Street summarizes. If you want to invest in a specific area, you’ll need need a fund or some stocks – let’s make the argument for funds. [ETFs: A Portfolio Diversifier.]
A number of factors go into how an ETF performs and represents its market segment.
Some ETFs may not perfectly match a segment of the market since there may be disproportionate weightings of individual stocks within a fund. For example, PowerShares NASDAQ-100 (NASDAQ: QQQQ) has a 20% weighting in Apple (NASDAQ: AAPL). Whether that’s bad or good depends on you: What’s your risk tolerance? Would you rather have equal weight? Or do you already own Apple stock?
But purchasing an individual stock comes with the risk of picking a dud that underperforms the entire segment of the market. [You, the Retail Investor, Are Using More ETFs.]