«Low fees and more: these are what make ETFs a valuable building block»
5 reasons why we use ETFs to build portfolios
At True Wealth, we put together all-ETF (exchange-traded funds) portfolios for our clients. Why? Let us show you five reasons why ETFs are the ideal building blocks for a state-of-the-art portfolio.
Reason 1: Built-in diversification
Every portfolio needs diversification to ensure a good balance between risk and return. You can achieve this using individual securities, but that’s complex and takes a lot of time.
With an ETF, however, diversification is already built in. Each ETF reflects the performance of a specific index, which in turn contains a range of individual securities. In some cases only a few, such as the ETF tracking the Swiss Market Index, which only contains 20 shares. But others use many more, such as the popular US equity market index, the S&P 500, whose very name boasts of its huge selection of shares.
While 500 different equities sounds like a lot, even an ETF based on a broad index such as the S&P 500 cannot in itself ensure sufficient diversification. That’s because it only reflects the performance of equities, and only those from a single country (even though the major US companies, in particular, have a strong international footprint). Any investors wishing to diversify into other asset classes (which they certainly should) will need additional ETFs for this exposure.
Reason 2: All asset classes
The pioneering ETFs only tracked the performance of equities. Nowadays, almost all asset classes are available as ETFs.
ETFs are traded on the same stock exchanges where you buy and sell shares – the exchanges with the most clients and the largest trading volumes. This makes it easier to access:
- Bonds (individual bonds are only traded on specialised exchanges)
- Commodities (previously, commodity prices could only be traded using derivatives)
- Currencies (which can normally only be traded using special bank accounts)
- Real estate (which is not normally available at all on exchanges)
All you need is an index that measures movements in prices – and a fund provider that recreates (or ‘replicates’, as the experts say) these price movements.
Reason 3: High liquidity
A well-diversified portfolio reveals its real strengths in the long run. But even if you have a long-term horizon, sometimes you have to make short-term changes. For example, if you want to pay cash for a new car and need to lay your hands on the money quickly.
Each and every ETF can be traded every day the markets are open. The trading volume of most ETFs is so large that retail investors can even sell large amounts all at once without shifting the market price against them.
Reason 4: No strategy
ETFs aren’t based on a particular investment strategy – and quite deliberately so. They track the index exactly the way it is constructed. The same way today and tomorrow, with no surprises. That’s precisely why indices were created in the first place: to provide a reliable benchmark. It’s why the media, for example, only have to give a single figure if they want to report on how the markets performed today. And speculative investors can use derivatives such as futures and options to bet on this reference price.
None of these objectives involve actively managing assets using an index. Or building a balanced portfolio using one single index. That is something all investors have to accomplish themselves using ETFs. But investors can even turn this attribute to their advantage if they determine the strategy themselves. And that’s exactly what we do at True Wealth – we achieve an optimum combination of different ETFs.
Reason 5: Low fees
If an ETF sells new shares or units to investors on the exchange, the fund manager has to buy the components individually – for example, all 500 shares in the S&P 500. That’s a lot of work. But it also avoids a lot of strategy decisions, research and projections. It means that ETFs are very easy to construct and affordable for investors.
Low fees and many other benefits are what makes ETFs so valuable as components of a portfolio – because high fees are the arch enemy of your return. And all the more so in today’s interest rate environment.
Which ETFs do we use?
We’re often asked which ETFs we use at True Wealth. We work independently of the product creators and do not promote particular ETFs or providers. Our asset management incorporates ETFs from ETF Securities, iShares, SPDR, Vanguard, UBS and ZKB, depending on the asset class. For bonds, for example, we use ETFs from iShares and SPDR, ETFs from ETFS for commodities, ETFs from ZKB for precious metals, for Swiss equities we are also happy to use ETFs from UBS, and ETFs from Vanguard for US asset classes.
A previous version of this article was published on 05/29/2015