Some Index Funds and ETFs Are Not Diversified

by ABC

bewareofdog1One of the benefits of index funds and exchange traded funds is that they allow you to easily purchase a low cost diversified investment product.  Diversification is a key concept in investing so this is an important factor.  For example if you want to buy a fund that contains only American companies then a S&P500 index fund might be a good product.

Not all index funds and etfs are diversified

Index funds and etfs can be based on any stock index or group of stocks (sub-index) that the fund creator decides on.  The problem is that there are a lot of index funds and etfs that are based on very narrow segments of the economy.  The PowerShares DB Oil fund is an index fund that is intended to reflect the performance of light crude oil.  This sounds great for an investor who is interested in oil but not very suitable for a passive investor who just wants their index funds to be as diversified as possible.

Some diversified indexes

For American companies – index funds and etfs based on the S&P 500 are a good choice for diversification.  Vanguard has an etf (VTI – total stock market) which represents at least 99.5% of the total market capitalization of all U.S. common stocks traded on the major stock exchanges.

Europe can be covered with the Vanguard European Stock Index Fund (VEURX) and Asian stocks are easily purchased with Vanguard Pacific Stock Index.

These are just a few examples – there are many similar type funds available – I recommend signing up for a free Morningstar membership which enables you to easily look up the information behind index funds and exchange traded funds as well as the costs.

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