When investing in the stock market, you need a diverse portfolio. One way to achieve this is by investing in ETFs. An exchange traded fund, or an ETF for short, is a fund that holds a basket of stocks or other securities. All the stocks within an ETF are weighted in percentages, which acts to balance the price and overall value of the ETF.
The great thing about many ETFs is the diversity they offer. Instead of buying one stock, an ETF spreads risks by investing in multiple companies. This means that if one stock in the basket does poorly, it is balanced out by the other stocks. The stocks within the ETFs can be chosen based on their sector, market capitalization, or other factors.
An example of a broad, diversified ETF is SPY. SPY is an ETF that tracks the S&P 500, a collection of the top 500 stocks in the US based on market capitalization. Inside this ETF, Apple accounts for 5.9%, Microsoft accounts for 5.6%, Amazon accounts for 4.05%, and many other stocks hold a percentage, which determines how much they impact the overall value of SPY. Through this approach, you limit the risk your portfolio faces and you don’t have to solely rely on one stock to perform well.
The diversity and lower risk attracts a variety of investors to put their money into ETFs. ETFs give investors a chance to spread their money throughout a basket of securities and can receive high returns on their investment in a relatively safer way. Investing through ETFs is a great long-term strategy, especially for an
average investor.