- Did you know that exchange-traded funds are now 80% bigger than the entire hedge fund industry?
- Today, Nicholas Vardy explains why ETFs are growing more and more popular – they’re like Legos for investors.
Like most kids his age, my 5-year-old son loves Legos – the colorful interlocking plastic bricks first made in Denmark in 1949.
Last week, we walked through Leicester Square in central London.
Although there was plenty to see and do, my son was more intrigued by the Lego store, where the line snaked 100 yards outside the door.
Sure enough, we had to wait in the heat for 30 minutes before we could explore the wonders of the Legos inside.
Here’s what my son finds magical about Legos…
He gets to pick and choose which Lego blocks he likes. He can use them to build anything he wants. And he is limited only by his young imagination.
As an investor, you can say the same for exchange-traded funds (ETFs).
Legos for Investors
I like to think of ETFs as the Legos of the investment world. Like Legos, ETFs come in all sorts of colors, shapes and sizes. They offer an astonishing range of asset classes, investment philosophies and niche trading strategies.
In short, ETFs allow you to custom build any kind of portfolio you want.
You may already be familiar with ETFs. They look, feel and trade like stocks.
Technically, each ETF is an index fund. And each invests in an underlying portfolio of stocks, bonds, commodities or currencies.
Much like a stock, the price of an ETF changes throughout the day. Large ETFs typically offer better liquidity and lower costs.
ETFs also enjoy tax advantages over mutual funds. When a mutual fund investor redeems their units or shares, the fund sells securities to pay them and generates a taxable capital distribution. When an investor sells an ETF, they just sell it to another investor and no taxable distribution is generated.
And with both retail investors and institutions climbing on board, interest in ETFs has exploded.
ETF inflows have hit $132 billion through June 2019, outpacing last year’s numbers.
With more than 300 providers managing 7,000 ETFs across the globe, total ETF assets have now hit $5.5 trillion.
Put another way, ETFs are now more than 80% bigger than the entire hedge fund industry.
Investment Building Blocks
Today, ETFs invest in all major asset classes, including stocks, bonds, fixed income, commodities and currencies – as well as derivatives such as options and futures.
Using ETFs, you can invest in everything from the robotics industry to Russian small cap stocks.
Are you a committed “buy and hold” investor focused on low costs? I’ve identified an ETF that invests in almost every U.S. stock and charges a tiny 0.03% per year. The $3 a year you spend on every $10,000 you invest costs less than a cup of Starbucks coffee.
Do you have a favorite red-hot investment theme? Today, you can invest in ETFs focused on cybersecurity or artificial intelligence or the exponential growth of technology.
Do you want to try a specific investment philosophy? There are ETFs for time-tested strategies like the “Dividend Aristocrats” or “Dogs of the Dow.” Other ETFs invest only in companies buying back their stocks or those selling shares in public offerings.
Do you believe the U.S. market will continue its melt-up? You can invest in ETFs that offer two and three times the leverage on the S&P 500 Index to turbocharge your gains.
Does the fear of a market crash keep you awake at night? Dozens of ETFs allow you to bet against – or go short – the market.
Global investing legend Sir John Templeton made his biggest fortune buying and holding Japanese stocks for 30 years. Yet Templeton made his quickest fortune betting on the collapse of internet stocks in 2000.
As the old Wall Street adage goes, “The bull climbs up the stairs, and the bear jumps out the window.”
Basically, while you can get rich slowly in a bull market… you can do it overnight in a bear market. That’s what Templeton did, and by using ETFs, you can replicate both strategies with the click of a mouse.
Building Your Ideal Portfolio
Like all those multicolored and differently shaped Lego pieces my son loves, ETFs today offer an astonishing variety of investment opportunities.
And you can assemble these Lego building blocks of investing any way you want.
If there is a downside to investing in ETFs, it is this…
With more than 1,100 ETFs trading on U.S. stock exchanges, the choice among ETFs can seem overwhelming. And the number of new ETFs grows by the day.
As The Oxford Club’s ETF Strategist and Editor of Oxford Wealth Accelerator – The Club’s ETF investment service – I will guide you through the ever-expanding universe of ETFs.
By offering a range of ETF portfolios with diverse objectives, Oxford Wealth Accelerator can help you build your ideal portfolio using the Legos of the investing world.
Interested in hearing more from Nick? Follow @NickVardy on Twitter.