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Investors Making Moves to ETFs to Diversify Asset Classes

Exchange-traded funds are now expected to grow assets under management to almost double to $6 trillion by 2020, according to research by professional services firm EY. ETFs now provide investors with low-cost access to many asset classes that can not only introduce portfolio diversification benefits, but also offer higher expected returns.

ETFs are financial instruments that offer investors flexibility in trading, cost savings compared to mutual funds, tax efficiency and broad diversification of an investor’s portfolio, characteristics that have helped drive popularity since their introduction in 1993. ETFs have some characteristics of mutual funds but trade throughout the day, similar to individual stocks. They are comprised of baskets of stocks, bonds or other assets.

For investors doing their homework before investing in ETFs, TipRanks can be a valuable resource, with important data on not only the exchange-traded fund itself, but also the underlying assets. Let’s take a quick look.

Many ETFs are “capitalization -weighted.” This means that the individual stocks within the index are based on each stock’s total market capitalization, according to Fidelity. Stocks with higher market capitalizations are weighted more heavily than stocks with lower market capitalizations. As a result, it is possible for a handful of highly valued stocks to represent a large percentage of the index’s total value.

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