Worried About Stock Volatility? Consider an Exchange Traded Fund

October 25, 2018
1220 Views

October, as expected, has been highly volatile in terms of stock market activity. Even some of the most successful stocks of the year have not been able to avoid single day slides, with leaders like Amazon, Microsoft, Apple, and Facebook all taking hits. For investors, stock volatility periods can come with a lot of anxiety, especially if a portfolio is not well diversified, so you must consider an Exchange Traded Fund.

Simple Diversification With an Exchange Traded Fund

With your own investments, understanding the importance of diversification and effectively carrying it out are two very different things. A diversified portfolio can be costly and time consuming to develop.

If you feel like your portfolio could use more protection, but you don’t want to micromanage your investments, then you could choose to invest in an Exchange Traded Fund (ETF). This type of fund will give you more exposure to the best stocks, is professionally managed, and having one in your portfolio could help to protect you from volatility.

Popular Stocks Held by Most Large Cap ETFs

The largest and most popular Exchange Traded Fund have similar stock holdings. Fund managers prefer large cap growth stocks that are known for past success and their ability to recover after market downturns.

An example is the Vanguard Large-Cap ETF (NYSE ARCA: VV), which has Apple, Microsoft, Amazon, Berkshire Hathaway, and Facebook shares in its top 5 holdings. By spreading the risk across different large caps, the losses from months like this one can be minimized.

Large cap ETFs are mostly comprised of technology sector stocks, but there are outliers like Exxon Mobil (Energy), Johnson & Johnson (Health Care/Life Sciences), and JP Morgan Chase & Co. (Financial Services).

How Do ETF’s Generate Returns?

ETF’s generate returns in the same way that you would by investing in stocks through a brokerage service. Dividends (and sometimes sales) generate revenue for investors. The difference is that an Exchange Traded Fundtrades on a much larger scale than the average investor.

Balancing of a fund is performed continuously to minimize risk, and ETFs are often conservative when it comes to buying new holdings or selling existing ones. The market losses being witnessed today could cause some private investors to panic sell, whereas Exchange Traded Fund fund managers are more likely to ride out the wave and enjoy the benefits of the upturn.

Of course, Exchange Traded Fund are based on publicly traded stocks, so they’re not completely risk-free. However, the benefit of a managed fund can be particularly appealing if you want more exposure without the necessary investment of time or research.

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