ETFs and physical assets: How complementary are they?
ETFs provide a practical approach to get exposure to a variety of assets and markets when choosing an investment. Contrarily, physical assets are harder to buy and sell on your own merit, and frequently call for particular knowledge, expertise, or skills.
As an alternative asset platform, why do we also root for ETFs? Well because we are pro-diversification.
ETFs are so-called passively managed funds that track, for example, a stock market index such as the SMI (Swiss Market Index) or the S&P 500. First, they are cheaper than actively managed funds. Second, over the past 15 years, 80% of ETFs have outperformed actively managed funds. Since ETFs offer out-of-the-box diversification and don't require large amounts of money to invest in a wide range of stocks, they are the ideal place to start investing in financial instruments.
Ins and outs
ETFs can be purchased and sold on exchanges at any time during the trading day, whereas selling physical assets may be more difficult and time consuming. Now of course, it depends on the ETF and on the physical asset within the category, as well as the given market conditions. ETFs can be easier to sell due to their liquidity. Physical assets, such as real estate or collectibles, may be more difficult to sell as they may be less liquid and may require more effort to find a buyer at any given time. Additionally, ETFs can offer diversification and low transaction costs, making them the perfect addition to any physical asset portfolio, be it addition to gold, whisky, or private equity.
Maintaining and storing physical assets incurs higher costs than ETFs, which is why they need to be handled by professionals in most cases; it’s not as simple as adjusting the temperature in which you store a physical asset such as wine that determines its whole value and condition. As stocks, ETFs are vulnerable to market uncertainties. On the other hand, physical assets are also susceptible to risks in the value of the underlying item. While returns for physical assets can be influenced by a number of variables, including supply and demand, condition, and rarity, returns for ETFs are mostly driven by the performance of the underlying assets. Despite the distinctions between physical assets and ETFs, both investment types can be significant components of a well-diversified portfolio, and highly complement one another.
Tangible assets can deliver more consistent returns and serve as an inflation hedge, and ETFs allow quick access to a wide range of assets and marketplaces. You may be able to lower your overall risk and improve returns over time by including both types of assets in your portfolio. Diversifying your portfolio is important because it helps to spread risk across a variety of investments. By not putting all of your eggs in one basket, you are less likely to experience significant losses if one particular investment performs poorly. Diversification can be achieved by investing in different asset classes, starting with physical assets, ETFs, as well as many more. Diversifying across different asset classes can also help to balance out the overall risk and return of a portfolio. Additionally, diversifying your portfolio can also help minimize the impact of market fluctuations and provide a more consistent return over time on your assets. One avoids downturns in a specific market.
The secret lies within another magic word; consistency. With ETFs, investing on a regular, monthly basis is a strategy known as dollar-cost averaging. This can be a good strategy for investors who want to reduce the impact of market volatility on their investments. By investing a fixed amount on a regular basis, regardless of the price of the investment, an investor can purchase more shares when prices are low and fewer shares when prices are high. This can help to average out the cost of the shares over time, potentially reducing the overall cost of the investment. However, it's important to note that past performance is not an indication of future results. And as for physical assets, we have come to learn that investors have a very similar approach, and tend to like to invest once a month following the receipt of wages. Investing after receiving a salary is a good strategy for many people, as it allows them to set aside money for long-term goals while still having enough to cover their immediate expenses. This allows investors to automatically set aside money for investment each month, and even creating standing orders.
In conclusion, while physical assets and ETFs each have distinctive qualities, both are beneficial elements of a well-diversified investment portfolio. Investors can choose the optimum asset allocation strategy for long-term growth by considering the variations in allocation, investment strategy, risks, and returns. Physical assets serve as an inflation hedge and have the ability to protect against inflation, while ETFs can provide high returns in bullish market times due to their high liquidity.