In this scenario, Exchange Traded Funds (ETFs) emerge as optimal instruments for executing diversification. These funds, traded on stock exchanges, replicate a specific index, such as an industrial sector, a country, or a region, grouping a large number of individual stocks into a single investment. In this way, investors can gain exposure to a broad segment of the market without the need to buy and sell individual stocks.
To better understand how ETFs work, let's take the QQQ as an example, an ETF that replicates the Nasdaq 100 index. This index includes 100 of the largest technology companies in the United States, such as Apple, Microsoft, and Amazon. Investing in the QQQ provides exposure to these companies in a single transaction, effectively diversifying risk and capitalizing on the tech sector's collective growth.
The price of QQQ fluctuates throughout the day in the same manner as an individual stock, reflecting the performance of the companies comprising the index.
While diversification is an invaluable tool for reducing risk in investments, it's important to remember that it's not a guarantee of absolute success. There will always be stocks that outperform or underperform the market as a whole.
At Numa, we understand and value the principle of diversification in our investment strategies. That's why our Machine Learning strategies focus exclusively on investing in the 4 representative ETFs of the US market.
