By Doug Morris, CEO of Sharesight
For many years, retail investing was associated with investors building portfolios around individual companies. Investors bought shares in businesses they recognised, followed dividend payments and tried to identify the companies or markets they believed could overperform.
That approach has not disappeared. Individual shares still play an important role, particularly for investors who want direct exposure to specific companies, long-term holdings or dividend streams. However, the centre of gravity is shifting. A growing number of UK retail investors now use exchange-traded funds as the foundation of their portfolios.
This is not simply a change in product preference. It signals a wider shift in how investors think about risk, diversification and long-term wealth. Instead of relying on a small group of individual shares, many investors are using ETFs to access multiple sectors, regions and themes through a single holding.
That should be welcomed. ETFs can make diversification easier, cheaper and more accessible. Still, as portfolios become more diversified on the surface, investors still need to know what they actually own, where exposures overlap and how each position contributes to performance and income.
Why ETFs Have Become So Popular
The rise of ETFs is easy to understand. They are accessible, flexible and relatively simple to hold. For investors who do not have the time, confidence or capital to build a portfolio from individual companies, ETFs offer a practical route into the market.
A single ETF can give an investor exposure to hundreds, or even thousands, of companies across different countries, sectors and asset classes. For newer investors, particularly those entering the market through app-based investing and fractional-investing platforms, that simplicity is powerful.
Recent market volatility has also encouraged investors to think more carefully about diversification. Rather than concentrating heavily in a handful of high-profile US technology stocks, many are looking for broader market exposure and more resilient portfolio construction.
ETFs are also well suited to the way modern portfolios are built. Investors can combine broad global equity exposure with more targeted themes such as income, commodities, fixed income or specific sectors and markets. As a result, the average UK retail portfolio is becoming less reliant on individual stocks alone and more likely to include multiple ETF holdings alongside direct equities.
Diversification Still Needs to be Understood
Diversification only works if investors understand it properly. Holding several ETFs does not automatically mean a portfolio is genuinely diversified. Many funds can contain the same underlying companies, sectors, markets or currency exposure.
This creates a new challenge for retail investors. A portfolio may look diversified because it contains several different fund names, but underneath it may still depend heavily on the same small group of large companies. For example, a global equity ETF, a US index ETF and a technology ETF may all carry significant exposure to similar large-cap stocks.
Without a clear view of underlying holdings, investors can underestimate concentration risk and overestimate how diversified their portfolio really is.
The same issue applies to income. An investor may hold a mix of ETFs and individual shares, but still lack a clear view of how much income the total portfolio is generating, how reliable that income is and how it compares with capital growth. For dividend-focused investors, that matters. ETFs can simplify portfolio construction, but they can also make it harder to understand the income contribution of underlying holdings.
Multiple Platforms, One Fragmented View
Modern investors often hold assets across several platforms. They may use one broker for UK shares, another for overseas equities and an app for ETF holdings. Some may also have separate records for pensions, cash, crypto or alternative assets.
Each platform may provide useful information locally, but stitching that information together into one clear picture is not always straightforward. Investors need to know whether they have genuine diversification, whether certain exposures are being duplicated across accounts, and how each holding contributes to overall returns — questions that get harder to answer the more platforms are involved.
A More Disciplined Investor Market
The rise of ETFs should not be viewed as a retreat from traditional investing or stock-picking. It is better understood as part of a more disciplined approach to portfolio construction. Many retail investors are moving away from the idea that successful investing depends on selecting a small group of winning companies. Instead, they are building portfolios around diversification, structure and long-term exposure.
That is positive, but it increases the need for clarity. Investors need to understand what sits underneath their ETFs, how their holdings overlap, what income they are receiving and how performance looks after dividends, fees and currency movements are taken into account.
As UK investors continue to embrace ETFs, those who can see beyond product labels and understand how every holding contributes to the portfolio as a whole will be better placed to make confident decisions.
