The rise of the Exchange Traded Fund (ETF) has brought the world an enhanced set of tools to gain portfolio diversification like never before. ETFs give passive investors a means to simplify the otherwise difficult and time-consuming task of creating a fully diversified portfolio of stocks to invest in.
In this article, I'm going to discuss why index ETFs are better options, generally speaking, than sector-specific ETFs like the Horizons Medical Marijuana Life Sciences ETF (TSX:HMMJ).
Investing in specific sectors, such as the cannabis industry, can hold higher levels of concentration risk than many investors may want to burden. This is particularly true given the passive diversification that is typically sought with ETFs in general.
The HMMJ ETF is a good choice for investors looking to examine what I mean by concentration risk. Most cannabis-related stocks tend to move in the same direction at the same time, and the largest producers account for the lion's share of market capitalization in the sector.
There's a really high correlation coefficient in this ETF which increases the overall risk profile of this investment for investors seeking diversification.
I would encourage investors looking for an ETF that represents a broad array of stocks to capture global stock market movements to consider the iShares Core MSCI World Ex-Canada ETF (TSX:XAW).
This ETF provides global exposure, outside of Canada, for those not looking to get hemmed into a sector-specific risks present in domestic markets (which are heavily weighted to energy and financials, which have underperformed as of late).
Invest wisely, my friends.
