ETFs Broken Down

Investment funds play an important role in every investor’s portfolio, be they mutual funds, index funds, or exchange-traded funds (ETFs), to name only a few. By participating in an investment fund, investors are able to pull together and enhance their purchasing power, bring in investment professionals (in some cases), lower investment-related risk, and reduce the cost of transactions.

ETFs combine many of the best elements of a mutual fund with the simplicity of stock trading. These products also tend to come with lower fees, competitive returns, and a wide array of options for investors. Plus, like mutual funds, ETFs are built with a certain amount of hedge included, which can help protect participants from risk exposure.

This is just scratching the surface of what ETFs are and what they provide. The real details that emerge when ETFs are broken down can help you decide where they might fit within your portfolio, and if there are other investments can serve a similar purpose.

The Basics on ETFs

There is an ETF for just about every portfolio. This financial product bundles securities (be they stocks, bonds, or other holdings) into one investment type that’s held by stakeholders. Most ETFs tailor to a specific industry or market index, but can feature any kind of investment strategy and asset mix.

ETFs also provide an easy option to introduce diversification into a portfolio, given that they include a basket of holdings rather than one or two specific stocks. Unlike mutual funds, ETFs are traded throughout the day, rather than at the beginning and end of each day. They may also eschew the role of a portfolio manager, which gives them an advantage over actively managed mutual funds with regard to fees.

Another advantage of ETFs is their ability to give investors a foray into a sector or industry they may not want to invest in directly through stocks. ETFs take the guesswork out of finding the right securities and making trades to optimize your returns. Instead, you can purchase shares of a well-performing sector ETF and keep track of its performance.

Common ETF Types

There are a little more than 5,000 ETFs on the market internationally, meaning that there’s a solution for almost every portfolio. Most ETFs can be categorized based on a few basic commonalities, such as sectors, markets, or security type.

Some ETFs are straightforward and track common indices, such as the S&P 500. Others track industries and market sectors, such as tech or health care. Some even track currencies, allowing investors to invest or short one or more foreign currencies. There are also ETFs that focus solely on commodities, such as precious metals or agriculture.

Each ETF type offers its own advantages, and the companies behind each ETF are quick to extol the virtues of what makes their portfolio unique. Ultimately, the real differentiator for investors is performance and their desire to have easy exposure to specific industry sectors or market indices.

The Pros and Cons of ETFs

ETFs are a great option for most portfolios—especially those that are risk-averse or for investors who want to enter a sector quickly and without having to take on much research beforehand. That doesn’t necessarily mean that ETFs are a cure-all, however. There are several reasons why you should consider ETFs, as well as a handful of reasons why you may not want to stuff your portfolio with ETFs in lieu of other investment options.

The biggest advantage of ETFs is their ability to open up new markets to investors who may not have existing investments in a sector or suite of security types. ETFs tend to offer an assortment of stocks within a specific industry, market index, or other qualifier. Investors can buy shares of an ETF and get an opportunity to earn a return on a share of well-performing stocks within the fund. In other words, ETFs can provide a quick and easy way to diversify your holdings.

ETFs are designed to maximize returns without taking on risk, which means that investors might end up leaving returns on the table if they had pursued other investment types—either in tandem with ETFs or in lieu of them entirely.

Alternatives to ETFs

ETFs are hardly the only game in town for qualified investors that want to enter a new market without having to dive headfirst into research to do so. There are other options that offer the same diversification and hedges that ETFs are known for, all without sacrificing gains for the sake of security.

For example, FarmTogether offers investors a range of investment options in farmland, curated by a team of investment experts and designed for a variety of investment goals. In this regard, FarmTogether offers many of the same positive attributes of ETFs with unique investment opportunities customized for individual investors—something ETFs can’t provide.

Plus, farmland investing can take the place of (or complement) commodities in your portfolio. Instead of buying individual shares of agricultural commodities or precious metals, FarmTogether pairs the best of commodities and real estate investments into one opportunity. You can purchase shares of farmland and avail yourself to a percentage of the crop’s sale at the end of harvest, as well as the underlying farmland’s value.

ETFs and Your Portfolio

There are a ton of advantages and disadvantages to incorporating ETFs in your portfolio. One of the greatest benefits ETFs provide is stability and returns that keep pace with the market or sector they focus on. The downside to ETFs, however, is that investors may be leaving returns on the table that they might otherwise get through other kinds of investments.

Farmland investing, for example, can offer risk-averse investors with opportunities to capitalize on higher returns without taking on inordinate amounts of risk. With FarmTogether, farmland investing gets even easier and more customizable, as our team of investment experts can talk you through a variety of options and help you craft a unique portfolio of holdings.