Exchange-traded funds are massively popular among private investors trying to grow their wealth. Today, I’m asking whether I can hit my financial goals with a single one that covers the global stock market.
What is a global ETF?
As it sounds, this sort of ETF invests in a huge basket of stocks from around the world. Some providers will only include companies from developed nations. Others will feature those from emerging economies.
Regardless, this is all done passively. There’s no (expensive) human fund manager making decisions in the background.
Things I love
There are a few reasons why I think a one-stop-shop global fund like this might be a great choice for me.
First, it gives instant exposure to an enormous number of listed companies. In theory, this diversification neatly removes the risk of being wiped out that comes with individual stocks.
Second, the passive approach keep fees low relative to most actively-managed funds. This could save me thousands of pounds over many years.
Sure, no fund (or stock) rises in a straight line. Future returns won’t necessarily match those of the past either. But multiple research studies show that equities have consistently outperformed all other asset classes over decades. And it’s this time period that we’re most concerned with at Fool UK.
But there are issues…
By its very nature, any ETF can’t beat what it tracks. This could mean it takes me longer to become a millionaire than if I ran a more concentrated portfolio.
Let’s use US chip-maker Nvidia (LSE: NASDAQ) as an example.
In the last five years, this tech titan has climbed nearly 2,700% in value and made some canny (and very risk-tolerant) investors rich. It goes without saying that this sort of performance has absolutely thrashed a global ETF, even though the latter would have had some exposure to this company.
But hindsight is a wonderful thing. In a parallel world, I might have backed a different growth stock exposed to the AI revolution and lost all of my money.
Moreover, the weight of expectation on Nvidia just keeps growing. Yes, businesses have been snapping up its graphic processing units (GPUs) like lightning. But this is now reflected in the frothy valuation. What happens when those clients have all they need for now or a competitor tries to steal its lunch? Even the outcome of the forthcoming US election could cause some volatility.
Another thing worth noting is that roughly 60% of a global ETF will be invested in the US. That’s to be expected — it’s the biggest economy in the world. But it might hit my returns if Uncle Sam begins to struggle.
One and done?
Taking my own circumstances into account, I know which of these two approaches works for me. And the simple answer is, both of them!
A lot of my wealth is now invested in global ETFs. Over time, I’m hoping it will allow me to retire as a millionaire. But we’re talking decades here. Patience is definitely needed.
However, I’ve still got a merry band of individual company stocks that I hope will outperform. This may get me to my target sooner or it may not.
But the point is that I’ll enjoy the process (and the dividends) as much as the result.
The post Is a global ETF all I need to become a stock market millionaire? appeared first on The Motley Fool UK.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
