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Home Investments

The role of exchange traded funds in a diversified portfolio

Fridah Karei by Fridah Karei
January 8, 2025
in Investments
Reading Time: 2 mins read

Exchange-Traded Funds (ETFs) have become increasingly attractive to Kenyan investors seeking to diversify their portfolios. According to the Capital Markets Authority (CMA), ETFs are collective investment schemes that pool money from multiple investors to purchase a diversified set of securities, such as stocks, bonds, or commodities. This collective nature enables investors to gain exposure to a broad range of assets with a single investment, reducing risk and potentially enhancing returns.

One of the primary advantages of ETFs in Kenya is their cost-effectiveness. ETFs generally have lower expense ratios compared to traditional mutual funds, meaning investors can save on management fees. This cost efficiency is particularly appealing in the Kenyan market, where reducing investment costs is crucial for long-term wealth accumulation. Lower fees ensure that a larger portion of the investor’s money remains invested, compounding over time to generate higher returns.

ETFs also offer excellent liquidity, as they are traded on the Nairobi Securities Exchange (NSE) throughout the trading day. This means that investors can buy and sell ETF shares at market prices at any time during trading hours, similar to individual stocks. This intraday trading flexibility allows investors to respond swiftly to market developments, implement strategies such as rebalancing, and seize short-term opportunities, thus enhancing portfolio management.

Another significant benefit of ETFs is their ability to provide instant diversification. By investing in an ETF, Kenyan investors can spread their risk across a variety of assets, sectors, or geographic regions, depending on the ETF’s focus. This diversification helps to mitigate the impact of poor performance in any single asset or sector, thereby stabilizing returns. For instance, ETFs that track international indices offer Kenyan investors exposure to global markets, reducing reliance on local economic conditions and providing a hedge against local currency fluctuations.

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Moreover, ETFs in Kenya offer transparency, as they typically disclose their holdings daily. This transparency allows investors to know exactly what assets they own within the ETF, facilitating informed decision-making and enabling investors to tailor their portfolios according to their risk tolerance and investment goals. The ability to track and verify the performance of ETF holdings enhances investor confidence and trust.

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