Like many investors, I’m a huge fan of exchange-traded funds (ETFs), particularly because they combine the best features of stocks and mutual funds.
When I invest in a particular company, I own only its stock
When I invest in an ETF, I own a diversified portfolio of stocks from many companies. Buying an ETF is like buying a whole basket of high-performing investments, thereby diversifying my portfolio. However, there’s an inherent danger in believing that you’re diversifying your portfolio simply by putting your money in ETFs.
When diversified isn’t diversified Investing in multiple ETFs can create an illusion of diversification while leaving you with greater risk, unnecessary costs, and a portfolio that may be more complex but is not safer. Here’s why: The most popular ETFs may have different names, but that doesn’t mean they have different holdings. In fact, you could purchase two or three different ETFs and barely get any diversification because each one holds overlapping stocks.