Investment Research

How ETFs changed the way ordinary investors build portfolios

16 July 2024 · 6 min read

Few innovations have changed personal investing as much as the exchange-traded fund, and few are as easy to overlook. By packaging a whole basket of holdings into something you can buy in a single trade, on an ordinary exchange, at a low cost, ETFs made broad diversification cheap, simple and available to almost anyone.

Diversification made simple

Building a spread of holdings once took real capital, effort and cost, and was mostly out of reach for smaller investors. A single low-cost ETF can now provide exposure to hundreds or thousands of underlying holdings at once. For ordinary investors, that turned diversification from a project into a default, which is a genuinely meaningful shift in who gets to invest sensibly.

New tools, same principles

What ETFs did not change is the fundamentals. Diversification, cost, time horizon and temperament still decide outcomes. The wrapper is new; the rules of patient investing are not. It is easy to mistake a modern tool for a modern strategy, but the two are different things.

The label is not the product

The success of the ETF has also produced thousands of them, and they are not all alike. Some are broad and low-cost; others are narrow, leveraged, thematic or expensive, and behave nothing like the simple index funds that built the reputation. As always, what sits inside the product, and what it costs, matters far more than the three letters on the label.

This is general information and education only. It does not take account of your objectives, financial situation or needs and is not personal financial advice. GBX Professional Services does not hold an Australian Financial Services Licence. Consider speaking with a licensed adviser before acting on anything here.