ETFs (exchange-traded funds) are bought and sold on the ASX like any other Australian listed company, however, they are not a business (like BHP, Woolworths or Telstra). They are an investment fund that can invest in various types of investments, with the aim of creating capital growth and income.
ETFs (exchange traded funds) are bought and sold on the ASX like any other Australian listed company, however they are not a business (like BHP, Woolworths or Telstra). They are an investment fund that can invest in various types of investments, with the aim of creating capital growth and income.
So, what is an investment fund? It is an entity that collects thousands of single investors (like you & I) and pools their money together to invest in a large portfolio (or basket) of investments like shares, property, bonds, commodities or infrastructure.
The share value, or price of the ETF, which is listed on the stock exchange, represents the total value of all the underlying investments that it owns.
The goal of the ETF is to provide a return similar to an index that it is benchmarking itself against (ie. the ASX 200 or for international shares, the Nasdaq is one example).
Buying an ETF is a way to invest in shares, without having to research and pick your own portfolio of direct shares. It’s like a ready-made investment portfolio that you pay someone else (the fund manager) to make all of the buy/sell/hold decisions for you.
1. Simplicity - ETFs help investors get invested in a range of different investments strategies, in Australia and overseas and many asset types (think shares, property, commodities, roads & tolls), and can be bought as simply by just buying one share on the ASX.
2. Diversification – the one share gives you access to investing between 20 – 2,000 shares under one listed share and purchase.
3. Transparency – because it’s listed on the ASX you can look up and see the buy or sell price, and how much your investment is worth, at any time. Most ETFs also disclose all of the shares it is currently investing in.
4. Liquidity – if you need to sell or withdraw some of your money, you can trade (buy/sell) during the hours of the market being open (Mon – Fri, 10am – 4pm Syd time), or place your order for the next day, and have your funds available in your bank account within 3 working days.
5. Lower fees – fees of ETFS are typically cheaper than other managed-style investments. You can expect to pay on average between0.10 – 0.30% *
The main risk of purchasing an ETF the investment risk associated with markets going up and down. For example, if you buy an Australian share ETF, which invests in shares on the ASX, when the share market goes down, then your investment value in the ETF will also go down.
To make this real… lets look at the past 12 months on the ASX 300 chart (as at 19/9/2022)
The market (or index) has gone down 7.2%. The EFT below seeks to track this index. Here is their performance over the same 12months.
If you invested $10,000 in this particular Vanguard ETF below, 12 months ago, your investment could have gone down 9.4% - or your investment would only be worth $9,059 today.
Note: The use of this particular EFT is for illustrative purposes only and is not intended to be an indorsement or recommendation. I’ve used it as it closely tracks the ASX300 index I’m illustrating.
Investing in shares has a 1 in 4-5 year chance of a negative return each year.
When your timeframe is short, shares are highly risky.
Over longer timelines (think 7 – 10 years), shares can provide a return of approximately 10.8%p.a. (based on the past 30 years from1991 to 2021 – source: Russell Risk VS Return 2022)
Other risks associated with ETFs are:
currency risk (when you invest in funds that have overseas exposure and their currency goes up or down against the Australian dollar (AUD)
liquidity – this would be where you invest an ETF that has exposure to riskier or larger fixed assets like emerging markets(China, India, Russia) or infrastructure (think toll roads, electricity companies and airports)
Buying or selling ETFs is as simple as buying or selling any share on the ASX.
You need a broking account which you open vi aa trading platform – like those offered by the 4 largest banks, personal trading platforms such as CMC markets or investing apps such as Raiz, Pearler or Stake#.
Once you have an account, you research the ETF you want to invest in, then use their ASX ticker code to purchase the fund on your trading platform.
To learn more about investing, including the difference between shares and ETFs and how they could help you achieve your investment goals and what things you need to be considering when researching your options, purchase my Investing in Shares masterclass recording for only $39.
Purchase your replay video here or email firstname.lastname@example.org to purchase your copy.
* Canstar, https://www.canstar.com.au/compare/etfs
# Note: The brokerage platforms mentioned are for illustrative purposes only and is not intended to be an indorsement or recommendation. It is important you do your own research or seek financial advice to determine which platform suits your own personal needs.
Karen Eley and Women Talking Finance Pty Ltd are Authorised Representatives of Fiduciary Financial Services Pty Ltd. AFSL 247344.
The content in this newsletter does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs.
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