So you want to build an investment portfolio but you understand that, no matter how booming the economy, investments are always a risky business, with most not being 100 per cent safe. And, like so many other persons, you’re particularly averse to risk. But what if you could make your investment safer, your risk, in the eventuality of volatile market movements? You can through investing by industry. This means spreading your money across an industry by way of an industry-specific investment fund or an industry-centred exchange traded fund (ETF), as against buying individual stocks.

ETFs are relatively new kids on the block in the investment world, introduced in the early 1990s but only really becoming popular in the aftermath of the global financial melt down of 2008, when investors started to be more risk-conscious and look for safer investments.

These funds trade on the stock exchange like any other stock, holding a set of assets whose composition mimics an index. And because the stock market is trending up, savvy investors can find bargains in subsets of stock market sectors that are expected to grow. ETFs are attractive precisely because it is usually easier to assess how safe an investment is across an industry sector by predicting the longevity of that industry’s products and services than it is to predict how well a single business will do. There are so many factors that can bring about the unravelling of a single company, including the rise of stronger competition, drastic product decline brought about by management changes, internal fraud, among many others.

So, for example, you want to invest in food. Food is a good investment because you know that 20, 30 years from now, people will still be eating food. But let’s say you’re thinking about buying stocks in one particular popular fast-food chain. Whilst this restaurant’s past performance may have been great, it’s still not a fail-safe indicator of where the markets will trend tomorrow. What if, somewhere down the road, a scientific discovery was made that, for argument’s sake, a key ingredient of their meals was directly linked to a serious health hazard, maybe even death, sending that company’s stock into instant decline?

On the other hand, an ETF in a basket of stocks across the food industry in general might be a better option, adding greater value to your investment portfolio and providing a safer investment.

Benefits of ETFs

We’ve already looked at one of the boxes checked by ETFs,in terms of providing safer cover for investors. But another benefit derived is for investors interested in casting their nets wide and participating in the international stock market. ETFs provide access to emerging markets, whether globally or within the region, as opposed to restricting investors solely to markets in the local field of play. Also, there is no restriction on the number of shares purchased and traded on the stock exchange. Another huge plus is, too, that ETFs tend to have higher daily liquidity,and because of their flexibility, investors can earn interest and dividend payments within a day, and opt to leave the fund, if they want to, also to jump back in again if they choose to.

Ones to Watch

When contemplating an ETF, the industries that seem poised to take off beyond 2020 include, among others, technology (to include wireless services and the digital economy); health care; and energy, which includes oil and gas exploration, making Guyana, with its economy set to boom as a result of the recent oil discovery, a destination to watch very carefully provided it finds a way to extricate itself from the quagmire brought on by its election results.

It is important, at this juncture, to warn against the impulse of buying “corona stocks”.The cleaning supplies industry is hot right now, as a result of the ongoing pandemic, and might be experiencing a transient financial tailwind. But whatever beefed-up profit stream it may have shown in the early days of the arrival of the virus, you must ask yourself whether that will be sustainable after a year or two when, we hope, a drug or vaccine is developed and the threat lessened? Already we’re seeing the initial rush on disinfectant and toilet tissue subside, now that we’re convinced that the end of the world has not in fact arrived and that Armageddon is not at our gates.

Although the benefits far outweigh the disadvantages, it is important nevertheless to look at the possible drawbacks. Is owning the ETF a good fit for your investment portfolio? Are the dividend yields lower than with an individual company? Is the bid-ask too large?

A good rule of thumb to apply when trying to determine whether an ETF is right for you is something financial guru Warren Buffet once said: Invest in businesses that you wouldn’t mind owning if, for some reason, the stock market were to be closed for an extended period.

Investors who are interested in exploring ETF options should speak to an investment advisor who will assist them in navigating the risks and rewards, helping them to find the right options for their investment goals.