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Exchange-traded funds are very popular among private investors trying to increase their wealth. Today I wonder if I can achieve my financial goals with just one that covers the global stock market.
What is a global ETF?
As it seems, this type of ETF invests in a huge basket of stocks from around the world. Some suppliers will only include companies from developed countries. Others will include those from emerging economies.
Anyway, this is all done passively. There is no (expensive) human fund manager making decisions in the background.
Things I love
There are a few reasons why I think a global one-stop fund like this could be a great option for me.
Firstly, it offers instant exposure to a huge number of publicly traded companies. In theory, this diversification clearly eliminates the risk of disappearance that individual stocks carry.
Second, the passive approach keeps fees low relative to most actively managed funds. This could save me thousands of pounds over many years.
Of course, no fund (or stock) goes up in a straight line. Future returns will also not necessarily match those of the past. But multiple research studies show that stocks have consistently outperformed all other asset classes for decades. And it is this period that concerns us most at Fool UK.
But there are problems…
By its very nature, any ETF cannot outperform what follows. This could mean that it will take me longer to become a millionaire than if I had a more concentrated portfolio.
Let's use the American chip maker NVIDIA (LSE: NASDAQ) as an example.
Over the past five years, this tech titan has risen nearly 2,700% in value and made some astute (and very risk-tolerant) investors rich. Needless to say, these types of results have absolutely destroyed a global ETF, although the latter would have had some exposure to this company.
But in retrospect it's a wonderful thing. In a parallel world, I could have backed a different growth stock exposed to the ai revolution and lost all my money.
Furthermore, the weight of expectations on Nvidia continues to grow. Yes, companies have been snapping up their graphics processing units (GPUs) like lightning. But this is now reflected in the frothy valuation. What happens when those customers have all they need for now or a competitor tries to steal their lunch? Even the outcome of the upcoming US election could cause some volatility.
Another thing worth noting is that approximately 60% of a global ETF will be invested in the United States. That's to be expected: it's the largest economy in the world. But it could affect my profits if Uncle Sam starts having difficulties.
One and done?
Given my own circumstances, I know which of these two approaches works for me. And the simple answer is: both!
Much of my wealth is now invested in global ETFs. In time, I hope it will allow me to retire as a millionaire. But here we are talking about decades. Patience is definitely needed.
However, I still have a cheerful group of individual company stocks that I expect to outperform. This may or may not get me to my goal sooner.
But the thing is, I'll enjoy the process (and the dividends) as much as the result.
