What was the top-performing ETF of 2021?

The iShares Oil & Gas Exploration & Production UCITS ETF (SPOG) managed an impressive 73.4% return over the course of the year. While the iShares Oil & Gas Exploration & Production UCITS ETF topped the performance chart for 2021, it was not the only ETF to generate hefty returns. The S&P 500 Energy Sector UCITS ETF (IESU) and the SPDR S&P US Energy Select Sector UCITS ETF (SXLE) returned 57.6% and 56.3% respectively, proving that 2021 was a particularly lucrative year for energy ETFs, against a backdrop of soaring gas and oil prices worldwide.

Why are ETFs great for diversifying your portfolio?

You can think of an ETF like a shopping basket. Rather than running around a supermarket holding all the individual things you want to buy in your arms, an ETF is like a basket already filled with a bunch of groceries, all in one easy-to-carry box. A single ETF can invest in a range of assets, from shares to bonds and even property, allowing you to get exposure to an array of different investments in just one product!

Do ETFs pay dividends?

ETFs which invest in shares receive dividends when those shares pay out, but this is not always passed onto the investor. Generally speaking, there are two ways that ETFs utilise dividends: reinvestment and payment.

Some ETFs reinvest the income they receive from dividend payments by using it to purchase new assets, often the same share that paid out the dividend in the first place, in a process known as "dividend growth investing". So although investors don't receive a conventional dividend, the value of the ETF grows as the number of shares it owns increases, and this in turn increases the value of the shares of the ETF itself.

Alternatively, an ETF can collate the dividends paid out by its underlying shares and distribute them directly back to the investors. There are lots of ETFs that invest specifically with these dividends in mind, such as the SPDR S&P Dividend ETF (SDY) or the Vanguard Dividend Appreciation ETF (VIG).

How many ETFs should you invest in?

First of all, remember that each ETF you own will likely invest in at least 20-30 stocks, and sometimes more. So if you hold 10 or more ETFs, you could have hundreds - or even thousands - of underlying shares in your portfolio. While it's important to invest in a range of products to diversify, you don't need to own dozens of ETFs to do this. In fact, a healthy 5-6 ETFs is plenty for the average investor, and will help you to keep a closer eye on the performance of each one if you're not losing track of how many you have!

What's the difference between an ETF and a mutual fund?

ETFs and mutual funds are similar investment vehicles. They both allow investors to access a range of different assets in a single wrapper, and are popular methods of diversification, but the key difference boils down to how they're traded: ETFs trade on the stock market throughout the day, like traditional shares, whereas mutual funds are only traded once at the end of each day. In addition, the majority of ETFs are passive, whereas most mutual funds are actively-managed and therefore charge slightly higher fees.