Discover the Investment Trend Everyone is Raving About! Find Out How Much of Your Portfolio Should be in ETFs Now!

As the popularity of exchange-traded funds (ETFs) continues to soar, especially among young investors using DIY investing platforms, the question arises: is there a downside to holding ETFs exclusively in your investment portfolio? Some Bay Street experts believe that as long as you get the asset composition right, having a portfolio entirely composed of ETFs can be a sound strategy.

1. Asset Mix and Risk: According to Ted Rechtshaffen, CEO of TriDelta Financial, having a portfolio that is 100% in ETFs is perfectly acceptable. What truly matters is the overall asset mix and risk profile of the portfolio. He compares ETFs to a refrigerator – the contents are crucial. Just like peeking inside someone’s fridge reveals their diet, the specific securities held in ETFs unveil the risk profile of the portfolio.
2. Advantages of ETFs: ETFs have gained traction among investors due to their passive nature, wide variety of fund options, ease of purchase, and notably, their cost-effectiveness compared to mutual funds. The accessibility to diverse assets through a single investment is an appealing factor to many investors, simplifying portfolio management and reducing transaction costs.
3. Fundamentals of Investing in ETFs: Rechtshaffen emphasizes that investing in ETFs boils down to basic principles like avoiding putting all your eggs in one basket, understanding your risk tolerance, time horizon, and diversification requirements.

In recent years, ETFs have witnessed a surge in investments while mutual funds have experienced outflows.

• 2022 and 2023 saw net sales of $36.1 billion and $37.6 billion for ETFs, respectively, compared to net redemptions of $43.7 billion and $57.1 billion for mutual funds.
• In the first half of 2024, ETFs garnered net sales of $32.6 billion while mutual funds recorded net redemptions of $3.1 billion.

Despite the benefits of ETFs, there are some downsides to consider. Allan Small, a senior investment adviser at IA Private Wealth, points out potential pitfalls of having a large portion of ETFs in your portfolio.

• Tailored Portfolios: ETFs are created for the masses, hence may not cater well to the specific needs of individual investors. Crafting a personalized portfolio from scratch tailored to your financial situation could be more beneficial.
• Profitability Concerns: Making money on ETFs can be challenging as performance may vary and cancel each other out.
• Industry Risks: Concentrated ETFs in a single industry like Canadian banks expose investors to specific market risks associated with that sector.
• Diversification Balance: While diversification is crucial for reducing risk, over-diversification can hinder profitability. Striking a balance between under-diversification and over-diversification is essential for portfolio growth.

In conclusion, while ETFs offer numerous benefits in terms of ease, low costs, and diversification, it’s vital to strike a balance in your portfolio to achieve optimal results. Customizing your portfolio to align with your specific needs and risk profile, alongside careful consideration of diversification levels, can enhance your investment outcomes. So, whether you opt for a full ETF portfolio or a mix of investment options, maintaining a balanced approach is key to long-term financial success.