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Exchange-traded funds are very popular among private investors trying to grow their wealth. Today, I ask if I can reach my financial goals with one that includes the global stock market.
What is a global ETF?
As it sounds, this type of ETF invests in a large basket of stocks from around the world. Some suppliers will only include companies from developed countries. Others will point out those from developing countries.
However, all this is done passively. There is no (expensive) human fund manager making decisions behind the scenes.
My favorite things
There are several reasons why I think a global one-stop shop like this would be a good choice for me.
First, it provides immediate exposure to a large number of listed companies. In theory, this diversification neatly eliminates the liquidation risk that comes with each stock.
Second, the passive approach keeps fees low compared to many actively managed funds. This can save thousands of pounds over many years.
Of course, no fund (or stock) goes up in a straight line. Future returns will not be the same as the past. But many studies show that equities have consistently outperformed all other asset classes over the decades. And this is the time we are most concerned about at Fool UK.
But there are problems…
By its very nature, any ETF cannot outperform what it tracks. This would mean that it takes me longer to become a millionaire than if I held a more concentrated portfolio.
Let’s use a US chip maker Nvidia (LSE: NASDAQ) for example.
Over the past five years, this tech titan has risen nearly 2,700% in value and is making small (and risk-tolerant) investors rich. It can’t be said that this kind of performance has knocked the world ETF down, even if the company would have known something about it.
But looking back is amazing. In the same world, I could back a different growth stock exposed to the AI revolution and lose all my money.
In addition, the weight of expectations for Nvidia continues to grow. Yes, businesses have been snapping up their graphics processing units (GPUs) like lightning. But this is now reflected in the measurement of the foam. What happens when those clients have everything they need right now or a competitor tries to steal their lunch? Even the outcome of the upcoming US election could cause some volatility.
Another thing to note is that about 60% of the world’s ETFs will be invested in the US. That’s to be expected — the world’s largest economy. But it might affect me if Uncle Sam starts struggling.
One more done?
Considering my personal circumstances, I know which of the two methods works for me. And the simple answer is, both!
Most of my wealth is now invested in global ETFs. In time, I hope it will allow me to retire as a millionaire. But we’re talking decades here. Patience is absolutely necessary.
However, I still have a fun band of stocks for each company that I hope will perform better than before. This may or may not get me to my goal faster.
But the point is that I will enjoy the process (and the benefits) as much as the result.
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