Exchange traded funds that track broad share market indices can help direct share investors reduce risk in their portfolios and lower their transaction costs.
In this paper, Vanguard Australia discusses portfolio construction theory and explain how including exchange traded funds in a concentrated, equally weighted portfolio of shares can reduce total risk (the overall volatility in portfolio returns) and active risk (the volatility of portfolio returns less benchmark or market returns).
Comprehensive examples of these concepts are provided, using historical returns data to illustrate the diversification and cost reduction benefits of investing in exchange traded funds.
To read the paper, click here.
