Some traders use exchange traded funds to get exposure to entire sectors while avoiding single-stock risk, while buy-and-hold investors often tap ETFs as building blocks for a diversified portfolio.
Risk management is extremely important in fast, volatile markets. ETFs, which are baskets of securities that trade like individual stocks, offer low fees, transparency and daily liquidity.
Diversification is an important investing principle designed to reduce risk within a portfolio of investments, by allocating to a range of various asset classes. ETFs have made diversifying a portfolio even easier. [What is an ETF? Premiums and Discounts]
ETFs are a basket of stocks tracking an index made up of one sector or asset class, already utilizing a built-in diversification method. The key is to look at the ETF composition and the actual companies that are holdings, because the title of the ETF can be misleading. Also, investors can be aware if they are heavily weighted to one company by taking this step, and be on the lookout for portfolio overlap. [What are ETFs?]