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Investment advicecan start to feel overwhelming fast.
It gets worsewhen financial experts throw around terms you dont understand.
One term you should definitely know is exchange-traded fund, or ETF.
Like most financial questions, the answer is: It depends.
Control vs.
Seriously theVanguard Total Stock Market ETF(VTI) offers broad exposure to the U.S. stock market.
That includes all business sectors and all market caps (company sizes).
So why doesnt everyone just invest in one or two ETFs to keep their portfolio simple?
Some investors want more fine-tuned control over their portfolio.
Perhaps they want to put more money towardsmall-cap U.S. stocks, or toward stocks in emerging markets.
The more ETFs you add to your portfolio, the more control you have over your asset allocation.
Take that desire for detailed control even further, and you’re able to invest in individual stocks.
The Downside to Too Many ETFs
Everyone likes more control.
But control comes at a cost.
First, it adds complexity to your portfolio.
What might start as four or five ETFs could easily grow to 40 or 50.
Adding more ETFs to your portfolio also adds to the risk of unintended overlap.
Several of your ETFs likely own the same companies.
Finally, more ETFs usually mean more fees.
The simplest, broadest ETFs usually charge almost nothing in fees.
Meanwhile, theVanguard FTSE All-World ex-US ETFcharges just a little more at 0.07%.
As you invest in narrower, more niche ETFs, expect expense ratios to rise.
Beyond Stocks
One or two ETFs could work if you only want to invest in stocks.
But what if you want to invest in bonds as well?
it’s possible for you to invest in ETFs that give you broad exposure to any of these investments.
And, of course, they add to the total number of ETFs in your portfolio.
It all comes back to simplicity versus control over your portfolio.
These offer diversification at a low expense ratio.
But some financial experts have started expressing concerns about too many retail investors just blindly investing in index funds.
Regardless of your personal opinion of Elon Musk, he has raised several thoughtfulwarnings about index funds.
Even so, ETFs offer an easy way to diversify your portfolio at little cost.
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