Broad vs Narrow market exposure

Investors in equities have numerous options to invest.  The increasing popularity of exchange traded funds (ETF’s) have segmented market exposure into two main categories, wide market exposure through ETF’s and narrow market exposure to specific companies.   These two main categories can be further segmented into actively managed and passively managed.  The graphic below demonstrates the movement in funds over the last few years between these 4 strategies.

Source: FT.com

There are numerous reasons for this shift from mutual funds to specifically passive ETF’s, including:

• The broad bull market that has been going strong since 2009 where any exposure to equities have been rewarded.

• The concentration of the market in a small number shares, the magnificent 7 that dominates the major share indices.

• The low cost of ETF investing vs Mutual funds

In a market with high valuations and greater volatility, choosing a concentrated portfolio of quality shares can be better alternative than ETFs. Any long term portfolio should have an element of both.