Hi there,

Welcome back to Finance Friday! Last week, we introduced Exchange Traded Funds (ETFs) as a way to simplify building a diversified portfolio, potentially even easier than Ronald Reed's approach. This week, let's dive deeper into the world of ETFs

The Power of ETFs for your Portfolio

From last week’s newsletter, you will remember that ETF stands for Exchange Traded Fund. These funds pool money from many investors, but what exactly do they buy, and why are they so powerful?

A Basket of Assets

You can think of an ETF as a basket holding lots of assets of a certain type.

Imagine that you are shopping at your local supermarket but you only have one shopping basket. How many items can you buy? You are limited by the size of your shopping basket. So you may be able to buy say 20 or 30 items before your basket becomes full. These 20 or 30 items may include a few items of meat, vegetables, fruit, bread etc. Then you have to stop shopping and take your produce home.

In investing terms, this was Ronald Reed’s approach. Ronald Reed bought well-known companies that he understood. He was not limited by the size of his shopping basket but by he was limited by the amount of money he had to spend.

Now, imagine buying a bit of everything in one convenient package. This "package" holds a tiny portion of every meat, fruit, and so on, offering a diverse mix. That's the essence of an ETF except that shopping items are replaced by financial assets!

Let’s Look in more Detail.

We mentioned World Equity ETFs last week. World ETFs contain investments from the most important companies, and in the most important sectors, all over the world. Here is a brief overview:

Countries

• United States

• Japan

• United Kingdom

• Switzerland

• China

• France

• Canada

• Germany

• India

Sectors

• Technology

• Financials

• Consumer Discretionary

• Healthcare

A typical World equity ETF will contain several thousand shares in companies. Some of which will be household names like Microsoft or Apple but many of which you will not have even heard of.

Can you see why an ETF allows great diversification?

Can you see how ETFs offer an easy solution for investors by reducing the number of decisions that they have to make?

Next Week:

We will look at the different types of ETFs available.

Word of the Day: Fund

Fund - money invested in a range of shares, bonds etc - often along with other investors’ money.

“The fund’s performance was terrible in 2022 due to the sudden rise in interest rates”

Do you have any Business English questions?

Please reply and I will do my best to answer them in future newsletters.

Until Monday - have a great weekend!

Iain.

www.communicateenglish.com

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