If you’re not sure what to invest in, an exchange-traded fund (ETF) can offer you a lot of diversification while still taking advantage of the broader trends in the market and underlying industry.
Take, for example, the cannabis industry, where there are many different stocks to invest in. Rather than having to decide whether to buy Canopy Growth or Aurora Cannabis, you could simply invest in the Horizons Marijuana Life Sciences ETF (TSX:HMMJ), which will give you a basket of pot stocks in one holding.
There are many different ETFs to choose from that can help you earn a balanced return without being overly exposed to an individual stock.
Which ETF should you choose?
Many investing books might encourage you to simply try and mirror the market, since that will give you long-run returns over time. The problem with that is, as we’ve seen over the past few years, especially on the TSX, mirroring the market can leave you with absolutely dreadful returns.
While holding for decades will help balance those fluctuations out over time, the challenge is that with a strategy like that, where you’re locking in your funds for a long period of time, you’re losing a big advantage of holding stocks: liquidity.
For many investors, tying up your holdings into one index fund could limit your ability to invest in other opportunities. That’s why I’m not a fan of the buy-and-hold forever strategy. We live in an era of rapid change and development, and what worked for Warren Buffett over decades might not be applicable in the years ahead.
Instead, focusing on certain segments of the market may be more effective. Industries will fall in and out of favour over time, not unlike what we’re seeing with cannabis stocks that were soaring last year and which haven’t had the same success this year.
However, the Horizons ETF has still been able to provide investors with returns of around 50% over the past year, and in the last three months it is up more than 25%.
But if you decide that cannabis is too risky, then you could invest in other ETFs, like the BMO NASDAQ 100 Equity Hedged to CAD ETF (TSX:ZQQ), which is one of my favourite options since it can allow you to bank on the growth of the top tech stocks in the world. And although it has struggled in recent months, year to date it has outperformed Horizons and been able to provide modest returns for investors.
Another good option is the BMO Equal Weight REITs Index ETF (TSX:ZRE), which will pay you a dividend close to 5% while giving you a great mix of REITs in your portfolio. It has actually outperformed both ETFs listed above since the start of the year.
If you’re looking to for an easy way to invest, then looking at ETFs is a great way to do so, but unless you’re prepared to hold for a very long period of time, then mirroring the market may not be an optimal strategy.
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Fool contributor David Jagielski owns shares of BMO NASDAQ 100 HEDGED TO CAD INDEX ETF.