Instead of painstakingly picking out individual stocks, investors can utilize broad index-based exchange traded funds to efficiently and cheaply diversify their portfolios.
The chances of a regular investor crafting an outperforming portfolio are pretty slim as even the average active manager has a hard time outperforming benchmark indices. Most often than not, the time and effort involved in picking a good stock would more than offset the performance gain. [Passive ETFs Gain Ground Over Active Funds]
Instead of trying to beat the markets, investors can utilize passive funds like index-based ETFs to track the markets.
For instance, Simon Moore, chief investment officer at FutureAdvisor, for Forbes points to four cheap and liquid ETFs that investors can consider incorporating into their strategic, long-term portfolios.
The Vanguard Total Stock Market ETF (NYSEArca: VTI), with a 0.05% expense ratio and 3,720 stock components taken from the CRSP Total Market Index, provides a cheap and broadly diversified equity option to capture the U.S. markets.
Looking overseas, investors can consider Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) as a way to access growing emerging economies. Whiles these economies can experience larger swings than developed markets, these emerging countries show attractive demographic trends, with large young populations and rising middle class. In contrast, many developed economies are seeing an aging population. VWO has a 0.15% expense ratio and tracks 935 stocks from a range of developing countries. [Core ETF for Investors, but Traders Still Love EEM]
As a way to balance out risk in the equities market, bond ETFs provide a more conservative play. For instance, the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG), which tracks a selection of U.S. Treasuries, mortgage-backed securities, agencies, and corporate bonds, provides income and exposure to high-quality debt. AGG has a 0.08% expense ratio, a 2.01% 30-day yield and 2,635 bond holdings.
Additionally, with the U.S. economy recovering, inflation will rise and eat away at bond returns. Investors can look for Treasury Inflation Protected Securities to help hedge inflationary pressures since the bonds adjust their value along with inflation. The Vanguard Short-Term Inflation-Protected Securities ETF (NYSEArca: VTIP) has a 0.10% expense ratio and a 1.11% 30-day SEC yield. [Fight Back Against Inflation with TIPS ETFs]
For more information on investing with ETFs, visit our ETF 101 category.
Max Chen contributed to this article.