Why ETFs Are A Core Of My Passive Income Portfolio

As much as I believe in having dividend stocks and selecting high quality names that I think will do well over the long term, I still hold a big portion of my portfolio in etfs and am a big fan of the investment vehicle. Why?

One big benefit is how simple the process becomes when I hold etfs. With 3-4 etfs, I can easily put my money to work. If I received $400 in etfs, that might seem too small of an amount to go out and do research into which stock to buy. What ends up happening for a lot of investors is they will wait to have bigger amounts but I will frequently sweep any amounts over a few hundred dollars into one of the 3-4 etfs that I hold. That keeps it simple, takes 2 minutes to do, etc.

Expected Index Outperformance: As you probably know, most active investors are unable to beat main indexes so that 2 minutes that I took to buy an etf will likely end up beating most active investors, not bad right?

Diversification: Given the time I’m able to put in, I have no interest in buying and following 30-40 high quality dividend stocks. I much prefer having most of my investments in etfs and to supplement this with a few good names that I have strong belief in. I do agree that if I hold Microsoft as a single name, it might also be part of my VTI etf holdings. That is not an issue in my opinion, it just needs to be considered when deciding on the allocation. 

Access Different Assets: While I do keep my portfolio simple, and stay away from most exotic type of investments,  I do use etfs to access international markets but also to gain exposure to fixed income. While my allocation to fixed income is small,I do expect it to grow over time and etfs are by far the most competitive way to trade both those. A few years ago, any important company would list its shares in the US but that is less the case now with several important European and Asian companies deciding to only list in Europe, Hong Kong, etc. In some cases, they trade as ADR’s or pink sheets on US markets but often they are much easier to trade in their local markets.

Liquidity and spreads: As many of you know, I have what some might call an obsession (i would call it just being diligent:)) in reducing costs for my investments and if you look at the top etfs, the liquidity is incredible. Take an etf such as Vanguard’s VTI which invests in the US equity market. You can buy and sell with at most 1c spread on a $240 etf representing a fraction of 1bp. Over time, those costs can add up if you compare to several single stocks. There is an annual management fee (most top funds are under 10bps). But those remain incredibly low and competitive. 

ETFs Are Tax Efficient: In general, ETFs are tax efficient investments compared to other types of investments such as mutual funds that can make a huge difference over time. 

Through my professional life, I got the chance to learn a lot more about etf’s and remain as convinced as ever about what they bring to my portfolio; a simple, easy, cost effective way to get exposure to the overall market. 

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