How Many ETFs Should I Own as a Beginner in 2023?
Reading time: 9 minutes
Navigating the market's enormous array of possibilities can be intimidating for an investor new to exchange-traded funds (ETFs). It might be difficult to know where to begin because so many ETFs are available that track various asset classes, industries, and regions. We will get into the issue of how many ETFs a novice should have in 2023 in this article, as it is a common question for new investors.
Understanding ETFs
Let's first discuss what ETFs are before discussing how many a beginner should purchase. Serving as an investment fund, an ETF trades on the stock market like an individual stock. ETFs can include asset classes such as stocks (equities), bonds, commodities, currencies (Forex) and even cryptocurrencies, which see prices change throughout the trading day (during exchange hours). In this sense, they are like an entire portfolio, a diversified portfolio in one security.
ETFs offer diversity which is one of its many important advantages. ETFs allow investors to gain exposure to a specific market or asset class without the need to purchase individual securities. This helps simplify the entire investment process, as one company underperforming in the sector will be made up by another one overperforming. (Diversification.) ETFs are also frequently inexpensive (low cost), which makes them a desirable choice for investors trying to minimize expenses.
How Many ETFs Should a Beginner Own?
The investor's goals, risk tolerance, and investing strategy, among other variables, all influence the response to this question. The majority of individual investors should, however, seek to hold 5 to 10 ETFs that are diverse in terms of asset classes, regions, and other factors.
Investors can diversify their investment portfolio across several industries and asset classes while maintaining simplicity by buying 5 to 10 ETFs. Because it can lower the risk of losses from any one security or market segment, diversification is crucial. In other words, you don’t want to own several ETFs that specialize in the same general area of the markets. The idea is to have a handful of ETFs that give you broad exposure to various parts of the market that aren’t always correlated with each other.
This will help in times when a specific sector is struggling. For example, if your GLD (Gold ETF) holdings aren’t doing well, it is possible that the SPY ETF (S&P 500 Index) will be doing well. This allows longer-term growth without the concerns of having concentrated losses.
Considerations While Choosing ETFs
There are a number of things to take into account when choosing ETFs to include in your portfolio. While not everything you need to know, these are the essential considerations for most investors:
Expense Ratio
The annual management fee for the provided ETF is known as the expense ratio. Since fees can eventually reduce your returns, selecting ETFs with low expense ratios is critical. This is often one of the most overlooked issues that investors deal with. The compounding aspect of these fees can add up over time.
Index Tracking
Most ETFs follow an index, like the NASDAQ or the S&P 500. It's crucial to consider how closely an ETF reflects its underlying index when choosing one. The likelihood that the ETF will provide returns that closely resemble its benchmark increases with the degree of tracking.
Other ETFs follow very specific areas of the economy. For example, the ITB is the iShares US Home Construction ETF. MGK is the Vanguard Mega Cap Growth ETF. XLC is the Communication Services Select Sector SPDR Fund ETF. Thousands of ETFs are available to trade and invest in, so it isn’t necessary to buy into any one particular company these days.
Asset Class/Geography
As was already said, one advantage of ETFs is their capacity to offer exposure to many asset classes and geographical areas. For example, there are ETFs such as SLV, which give you exposure to silver, and companies involved in that sector, such as miners and smelters. There are also others that offer geographical exposure, such as EWJ, which gives you exposure to Japanese companies. You should choose ETFs that offer exposure to the asset classes and regions you want to invest in when choosing them as investments.
Liquidity
How simple it is to buy or sell an ETF is called liquidity. To ensure that you may buy and sell an ETF quickly and simply, it's crucial to select ETFs with high trading volume. A low-volume ETF can be difficult to get into or out of.
Conclusion
Exchange-traded funds (ETFs) are considered a good method to participate in a variety of asset classes and geographical areas while keeping costs low. Although analysts generally agree that a beginner should aim to own 5 to 10 ETFs that are diverse in terms of asset classes, regions, and other factors, new investors are frequently unsure of how many ETFs they should own. Diversification should be considered because it can reduce the risk of losses from any security or market sector. For instance, holding several ETFs that provide exposure to multiple market segments that aren't usually associated with one another can be beneficial when a particular industry is in trouble.
There are many factors to consider when selecting ETFs, including the expense ratio, index tracking, asset class and geography, liquidity, etc. Due to the potential for fees to lower returns, investors should try to choose ETFs with low expense ratios. ETFs are more likely to deliver returns that mirror their benchmark if they closely track the performance of their underlying index. Choosing ETFs that provide exposure to the asset classes and geographical areas you want to invest in is also crucial. Selecting ETFs with significant trading volume ensures that buying and selling ETFs is simple and rapid. Investors can build a balanced and successful ETF portfolio that satisfies their investment objectives and strategies by taking these variables into consideration.
Interested in ETFs?
With FP Markets, you can trade a broad range of ETFs through CFDs (Contract for Differences). FP Markets provide several types of ETFs, including stock ETFs (or equity ETFs), bond ETFs, commodity ETFs and many more. Instead of owning the underlying asset, CFDs permit two parties to trade the underlying price movement of the ETF with leverage.
