DIY Investor Magazine
/
December 2015
38
WHAT DO ETFS
INVEST IN?
There are five major asset classes to consider when
building your ETF portfolio:
CASH
– the most liquid asset, and the safest since it
does not fluctuate with market pricing. However, returns
are typically low and may be wiped out by inflation.
BONDS
– Bonds are loans made by investors in return
for a fixed income stream over a specific period of time,
and the return of the initial sum at the end of the period.
Bond prices fluctuate day-to-day and break down
further into government corporate bonds with different
risk/reward profiles.
PROPERTY
– Commercial property, where an investor
gets an income stream derived from rent, plus capital
gains as buildings and land becomes more valuable.
ETFs invest in collections of listed property companies,
rather than directly into property.
ETFs enable you to construct a diversified portfolio cheaply and easily.
EQUITIES
– Traded shares of stock market listed
companies; can deliver income via dividends as well
as capital gains as companies become more valuable.
Over the long-term, equities in developed markets have
delivered the best returns, but at the cost of greater
volatility.
Equities can be divided by country, by sector, by size,
or in many other different ways delivering different
performance within an asset class.
COMMODITIES
– Commodities are bulk goods such
as gold, oil, and corn. They are traded on their future
prices and offered in ETFs as mixed baskets. Precious
metals, as an exception, may also be bought at spot
price through Exchange Traded Commodities (ETCs).
Commodities are generally used to increase
diversification in a portfolio and therewith lower risk
although ETFs with commodity exposure are popular
with short-term traders taking a view on the markets.
The number and size of available ETFs breaks down thus:
ASSET CLASS
NUMBER OF ETFS
AUM – ‘000,000 GBP
Equities
656
163,944
Bonds
150
62,363
Commodities
15
1,174
Property
17
8,911
Cash
9
1,543
Total
847
237,936
ETFS AT A GLANCE
