Five ways to diversify your portfolio using ETFs

With so many exchange trade funds (ETFs) to choose from, sometimes it helps to have the choices narrowed down.

In our latest guide investment experts, BlackRock, suggest five ways you can use ETFs to gain access to multiple companies, across multiple countries and regions and across multiple asset classes to help diversify your investments and spread your risk.

Diversification is getting harder

Investors have traditionally looked to historical relationships – or correlations – between different asset classes as a guide to creating a diversified portfolio. Combining investments that behave differently under certain market conditions can help mitigate risk, though such an approach won’t eliminate all risks tied to investing.

Achieving diversification is getting harder, however. Long-held correlations between asset classes once thought of as established no longer consistently hold true – for example, the price of debt issued by companies, known as bonds, are no longer moving as reliably in the opposite direction to share prices.

Investors cannot simply construct a traditional portfolio of 60 per cent shares and 40 per cent bonds and expect that the bond component will offer some protection should equity markets crash. Investors may need to consider gaining efficient access to multiple companies, across multiple countries and regions, and across multiple asset classes – including alternative assets, such as gold – to achieve a level of portfolio diversification that has the potential to spread risk more effectively.

Exchange traded funds

One way to achieve portfolio diversification could be to invest in exchange traded funds (ETFs). ETFs are a collection of shares which are pooled together into one basket. They can track a stock market index, such as the FTSE 100, and are an easy, inexpensive way to gain access to a varied range of large brands in the UK or overseas in one ‘share’.

So buying a FTSE 100 ETF, for example, will give you exposure to the biggest 100 companies listed on the UK’s stock market. This will help to achieve portfolio diversification and spread some of the risk in a single trade.

There are different types of ETFs, even amongst those that track the same index, so be sure to understand what those are as well as considering the suitability of an ETF against your individual needs and risk tolerance before purchasing. If you are in any doubt as to the risk or suitability of an investment or product, you should seek advice from an independent financial adviser.

To help you choose the ETF that’s right for you we’ve narrowed down the long, complicated list of ETFs in the market to just 100, and these are what we consider some of the best-in-class ETFs in the UK market today.