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Quick Take: Exchange-Traded Funds (ETFs) allow investors to achieve broad sector diversification, often with less upfront capital than buying numerous individual equities. By bundling dozens or hundreds of stocks into a single ticker, ETFs reduce single-company risk while offering targeted exposure to megatrends like technology, electric vehicles, and clean energy.
Why Exchange-Traded Funds Help Investors Diversify Their Portfolios
One of the best ways to invest in any hot sector is with an exchange traded fund (ETF). Not only does an ETF allow you to diversify among dozens of industry names, it also allows you to do so at far less cost.
Top ETF Examples for Targeted Sector Exposure
Tech Sector Broad Exposure: Technology Select Sector SPDR Fund (XLK)
For example, let’s say I wanted to buy the Technology Select Sector SPDR Fund (XLK). If I wanted to buy 100 shares of the XLK, it would cost me close to $20,000. With it, I can gain exposure to stocks, such as Apple, Microsoft, Nvidia, Visa, Mastercard, Broadcom, Cisco, Accenture, and another 68 tech holdings.
Or, I could always just buy one of the XLK holdings – let’s say 100 shares of Nvidia for just over $84,000 for just that one stock. In fact, every ETF offers similar diversification, at far less cost.
Focusing on funds that hold economic moat stocks may help investors identify companies with durable competitive advantages, although these holdings remain exposed to market downturns.
Electric Vehicle & Mobility Boom: KraneShares Electric Vehicles ETF (KARS)
For example, let’s say I wanted exposure to the electric vehicle market. After all, the electric vehicle boom is accelerating – and fast. Governments all over the world are pushing for a greener future.
The U.S. just promised to cut emissions by up to 52%. Europe says it’ll cut emission by up to 55%. China will stop releasing CO2 in the next 40 years. One way to diversity – at low cost – is with the KraneShares Electric Vehicles and Future Mobility ETF (KARS), for example. With an expense ratio of 0.70%, this ETF provides exposure to companies involved in the production of EVs and their components.
It’s also benchmarked to the Bloomberg Electric Vehicles Index, which includes stocks involved with electric vehicle production, autonomous driving, shared mobility, lithium and/or copper production, lithium-ion/lead acid batteries, hydrogen fuel cell manufacturing, and electric infrastructure businesses, according to KraneShares.com.
Some of its top holdings include Albemarle, BYD Co., Tesla, Panasonic Holdings, Aptiv, Samsung, and Lucid Group to name a few.
Clean Energy & Commodity Play: Global X Lithium & Battery Tech ETF (LIT)
Or let’s say I wanted to invest in lithium stocks at low cost. I can do so with the Global X Lithium ETF (LIT), for example. With an expense ratio of 0.75%, the LIT ETF offers exposure to stocks, such as Albemarle, BYD Co., LG Chem, Tesla, Livent Corp., Lithium Americas, and Quantumscape Corp.
So, instead of paying close to $11,500 for 100 shares of Albemarle, for example, I can pay just over $4,300 for exposure to far more with the ETF. If you’re on the fence about diversifying with ETFs, these are just a few of the top reasons you may want to consider investing.
Investors exploring income-generating strategies beyond ETFs can also learn about covered-call opportunities through Portfolio Payouts to structure monthly distribution schedules.
Frequently Asked Questions About ETF Investing
Q1: What is the main benefit of investing in an ETF compared to individual stocks?
A: The primary benefit is instant diversification. Instead of tying your capital to the performance of a single company, an ETF gives you exposure to a basket of companies across an entire sector, helping reduce company-specific risk. However, ETFs can still experience significant market volatility and investment losses.
Q2: Are ETFs cheaper than buying individual stocks?
A: ETFs can make diversified investing more affordable upfront. Purchasing 100 shares of multiple tech or mega-cap stocks can require tens of thousands of dollars in capital. An ETF allows investors to gain proportional exposure to those companies through a single trade, although fund expense ratios and trading costs should also be considered.
Q3: What is an expense ratio in ETF investing?
A: An expense ratio is the annual fee charged by the fund management company to cover administrative and operational costs. For example, an expense ratio of 0.08% costs $8 annually per $10,000 invested.
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Written by Dylan Jovine