ETFs are exchange-traded funds. A fund is a collection of stocks that’s pooled together so investors like me can simply buy the fund instead of having to buy all the individual stocks. ETFs are similar to mutual funds, but with one key difference. Most mutual funds aren’t traded on a listed exchange. As the name suggests — ETFs are traded, meaning that I can buy and sell funds easily just like stocks. With the ease of trading, here’s how I’d look to invest £5,000 in top ETFs now.
The benefit of using ETFs
With specific stocks, I have to be very selective in allocating my money. For example, if I think that renewable energy is going to be a big area going forward, my available funds probably mean that I can only afford to buy a handful of stocks from this area. Especially when I consider other sectors that I want to invest in, I’ll have to be incredibly picky on the particular stocks.
This isn’t always a bad thing, as my own research can highlight which companies in the sector could outperform. Yet at a broad level, sometimes it’s easier and better to not take this risk. With the top ETFs, I can make a play on the entire sector with ease.
Therefore, my first stage of allocating £5,000 would be to pick the main sectors that I want to invest in. I’d pick five areas, with £1,000 allocated to each. Everyone has their own opinion of what could be hot in the stock market looking forward. Personally, my five areas would be renewable energy, banks, healthcare, China and technology.
Top ETFs for each sector
From here, I need to find the top ETFs that match each criteria. Some areas will be easy to find appropriate funds. For example, technology. If I wanted, I could simply buy a NASDAQ tracker. After all, this index contains most of the large household tech names. If I want to be more specific, I could look at a Vanguard Information Technology ETF.
Other areas are slightly harder, so I need to be specific in what exactly I want. Let’s say I was interested in China. What do I mean when I talk about China as a theme? In my eyes, I think the prosperity of the middle class will grow in coming years. This should boost all areas of the domestic economy. So I’d want an ETF that includes Chinese companies, regardless of whether they’re listed on mainland China or in Hong Kong or Singapore. So Xtrackers MSCI All China Equity ETF could be a good option for me.
Once I’ve picked and invested in the five ETFs, my work is mostly done. Given the number of stocks within each fund, I won’t have to spend as much time as usual in monitoring the progress of each stock. Rather, I want to look at how each theme as a whole is performing, and then tailor this over time depending on how each sector does.
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jonathansmith1 and The Motley Fool UK has no position in any share mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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