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Why do you use ETFs in your portfolio instead of individual stocks and bonds?

We use ETFs in our portfolios because we believe ETFs have various advantages. ETFs are a convenient and cost-effective way to diversify an asset class in a portfolio. So, opting for a few ETFs in a portfolio is preferable to opt for a few thousand individual stocks and bonds to achieve the same level of diversification of the portfolio.

Using ETFs in a portfolio is cost-effective in spite of the ETF management fees incurred for each of those ETFs. Savings achieved across various costs including the trading fees, bid-ask spreads and portfolio administration expenses ensure that opting for ETFs in a portfolio is cheaper than opting for thousands of individual stocks and bonds.

Trading fees are lower if we opt for fewer ETFs instead of a few thousand individual stocks and bonds. The bid-ask spread can be low for ETFs that we prefer in our QuietGrowth portfolios, whereas the bid-ask spread can be high for certain individual stocks with low liquidity.

Portfolio administration expenses are lower if we opt for fewer ETFs instead of a few thousand individual stocks and bonds. For example, whenever we modify the portfolio mix by altering the allocation of various asset classes, it is easier to implement that modification when we use ETFs to represent these asset classes.

Similar is the case of opting for bond ETFs instead of individual bonds.

(Please note that the trading fee is included in our QuietGrowth MDA fee, whereas you incur the ETF management fees and bid-ask spreads. Refer to our Pricing page for more information.)

There are other advantages of opting for ETFs. For example, ETFs can be more tax efficient. This advantage is because of lesser realised capital gains tax incurred by the ETF issuer while managing that ETF, compared to us trying to replicate the ETF ourselves by buying and selling a large number of individual stocks.

That said, the innovation of direct indexing by automated investment management services has emerged in the U.S since 2015. We are positive about this. Using this method, QuietGrowth can opt for individual stocks instead of ETFs. We at QuietGrowth will not be introducing this at least for some time.

Refer to our Investment Methodology page and ETF Investing knowledge resource for more information.

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