Business is booming.

Specialist ETFs that spice up your index fund portfolio

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Similarly, in healthcare, as COVID-19 lingers in the coming years, you may want a global pharmaceutical or a biotech ETF.

Or you may seek exposure to emerging trends such as battery technologies and lithium, fintech and blockchain, climate change or clean energy like hydrogen. You may want exposure to specific regions such as Europe, Asia, Emerging Markets or specific countries.

‘Boring’ core v ‘exciting’ satellites

Another fast-growing niche is sustainable investing ETFs. You may seek commodity exposure like agriculture, gold or silver.

You won’t want to invest in all of these ETFs, but they can spice up your investing life.

So invest the “boring” core of your portfolio in main equity indexes, REIT ETFs and fixed income ETFs and complement it with exciting satellite investments. And you can do it all with ETFs.

However, do your homework. They are more expensive than standard ETFs (typically by 0.5 to 0.8 per cent each year) but are still relatively cheap for international investments.

Liquidity of niche ETFs matters, but not perhaps in the way you might think. Liquidity means the volume of trading in an investment. The higher the liquidity the better because you can more easily get in and out of the investment and the buy/sell spread (effectively a hidden fee) is lower.

ETFs have two different forms of liquidity – how much the ETF is traded on the ASX (a newly launched ETF will have low liquidity) and how much the underlying stocks held in the index trade on their market.

For example, a new US tech ETF on the ASX will have high liquidity from day one because the underlying US tech stocks are incredibly liquid. By comparison, a large, existing ETF in a small sector may have lower liquidity because the stocks it holds are traded far less often.

Also, understand how the index provider defines which companies are included in (or excluded from) the index. And understand concentration risk – for instance, a semiconductor ETF will be incredibly concentrated in the top 10 holdings because those companies dominate the semiconductor market.

Read More: Specialist ETFs that spice up your index fund portfolio

2021-10-25 21:39:00

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