7965 / What is the advantage of owning an ETF rather than individual stocks?

Because ETFs track particular indexes, they mirror the underlying index’s diversification. Diversification is the term used in the financial world for a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind the technique is the theory that a portfolio of diverse investments will both yield a higher return over time and pose a lower risk of loss than any individual investment found within the portfolio.

Studies and mathematical models have shown that, over time, maintaining a well-diversified portfolio will yield a higher return and provide the most cost effective level of risk reduction. Most individual or non-institutional investors have limited investment budgets and may find it very difficult to independently create an adequately diversified portfolio.

Because ETFs are traded as securities on the public stock exchanges, individual and non-institutional investors can purchase shares in an ETF and obtain the benefit of its diversification together with the expertise of the analysts and economists who select the stocks and bonds in the index which the ETF tracks.