If you’re thinking about investing but are not sure where to start, exchange traded funds, or ETFs, may be a great place to begin. Once you have a basic understanding of ETFs, you’ll find they can be a convenient and cost-effective way to participate in the sharemarket and build wealth over the long term.
What is an ETF?
Let’s start with a few investing basics, and recap on what a share is. When you buy a share, you invest in a single company, like Apple or Woolworths. Almost anyone can buy or sell shares via a securities or stock exchange using an online brokerage account or through a financial adviser.
Our exchange in Australia is called the Australian Securities Exchange, or ASX for short.
ETFs are a type of investment fund that trades on an exchange just like a share. ETFs provide an opportunity to get started in the share market because they are low-cost, easy to access, and provide instant diversification.
Let’s explore these concepts further.
Control what you can. Markets operate in cycles (ups and downs) which is something you cannot control. But what you can control, is how much you pay in fees. You pay an annual management fee for investing in an ETF, which is deducted from the value of your investment. No-one like fees – but ETFs typically charge much lower management fees than traditional investments, such as unlisted managed funds.
Get started for less
One of the most commonly-cited barriers to investing in ETFs is not having enough money. I have great news – you don’t need to be rolling in cash to start an ETF investment portfolio. ETFs have no minimum investment amount, and depending on which online broker you use, you could get started with as little as $50 (plus any brokerage costs)
Easy to access
The internet makes our lives easier in so many ways, investing being one of them. Using an online brokerage account, you can buy or sell ETFs during the trading day (generally 10am – 4pm, Monday to Friday). Learn more about online share trading brokers and compare the right one for you.
No need to pick and choose
ETFs generally offer a way to obtain instant diversification instead of having to invest in a single company or selected number of companies. Because ETFs are often constructed out of a portfolio of securities and typically aim to track a benchmark, the performance of your ETF investments are affected less by the performance of individual companies, and more by the performance of broader sectors or markets. Depending on an investor’s circumstances, it can often be easier and more reliable to analyse trends across an entire market, and this is one of the reasons more investors are increasing their investments into ETFs.
The beauty of diversification
Diversification is something that even veteran investors need to keep in mind, especially if they are to see their portfolios through the highs and lows of the market over time. Savvy investors are always looking for opportunities to diversify by spreading their investments in order to reduce (or spread) risk across their portfolio.
ETFs are a popular way to add diversification to an investment portfolio. Instead of selecting one or two companies, ETFs offer exposure to broad markets, including Australian shares and global shares, or different asset classes, sectors or themes.
For example, instead of picking one or two Australian companies, you may look at using an Australian shares ETF such as BetaShares’ Australia 200 ETF (ASX code: A200), which gives you instant exposure to the largest 200 companies listed on the ASX. Just as easily, if you wanted to diversify away from Australian shares, you could use an ETF to add a portfolio of leading global technology companies.
As with all investments, before diving in, it’s important to be aware that ETFs come with certain risks and the value of an ETF may go down or up. A passive (index-tracking) ETF’s performance is tied to the underlying assets which it holds. So, for example, if you choose an ETF that seeks to track the performance of the NASDAQ-100 Index, and that index dips in value, your investment in the ETF should also see a decline in value.
The next step: how to start investing in ETFs
If you think ETFs may suit your circumstances and investment goals, the next step is to decide what types of ETFs you might want to invest in. There is a broad selection of ETFs available on the ASX, providing exposure to a wide range of asset classes, sectors and geographic locations.
One approach is to choose a small number of ETFs that will form the long-term foundation of your portfolio, for example providing exposure to Australian shares, global shares and fixed interest (bonds). You can add to these over time.
ETFs can be an attractive way for newcomers to sharemarket investing to get a sense for investment, and to start building their wealth. They’re easy-to-use, cost-effective and versatile investment options, and their diversification is a critical benefit not just when you’re making investments for your wealth now, but for the longer term, too.
If you’re comparing Online Share Trading companies, the comparison table below displays some of the companies available on Canstar’s database with links to the company’s website. The information displayed is based on an average of 6 trades per month. Please note the table is sorted by Star Rating (highest to lowest) followed by provider name (alphabetical). Use Canstar’s Online Share Trading comparison selector to view a wider range of Online Share Trading companies.
About Ele De Vere
Ele De Vere is a Marketing Manager at BetaShares and is responsible for communications with beginner investor audiences.