On this post we are talking all things ETFs! These are my favourite investment and make up most of my portfolio. They are super easy to invest and manage, it becomes a very set and forget, passive investment that still provides great returns! I’ve been investing in these funds for a few years now and have an average of about 10% per year in returns.
What is an Exchange Traded Fund?
An Exchange Traded Fund, most commonly known as an ETF, is a fund made up of a group of shares from a certain index or sector. An ETF is a passive investment, which means that there is no fund manager picking certain stocks, rather it is just following an index. An index (plural-indices) are a measurement of the performance of a group of shares. For example, one index is the S&P/ASX 200 index, which tracks the top 200 shares on the ASX. Another index is the S&P 500, which tracks the top 500 US shares. These indices allow investors to view the performance of the broader market, or even specific sectors. So there are ETFs that track both the top 200 Australian stocks and the top 500 stocks, as well as ETF’s that track other markets as well as sectors such as health care, information technology, and many more.
What Can You Invest in Through ETF’s
- Australian Shares
- International Shares
- Different Sectors such as health care, IT, mining, industrials
- Commodities and precious metals
- Foreign Currencies
- Property (both commercial and residential)
- Fixed Income instruments such as bonds
Pros & Cons of ETF’s
Pros
- Instant diversification
- Cheap fees
- Easy to trade
- Transparent
Cons
- Market Risk
- Currency Risk
- Liquidity Risk
- Tracking errors
Where Can You Buy ETF’s?
ETF’s can be bought through stock brokers just like any other company on the stock market. They are bought as units, and can be bought and sold the same as any other share.
Examples of ETF’s
| ETF’s tracking: | Different ETF’s |
| Australian Market | VAS– Vanguard Australian Shares A200– Australia Top 200 ETF IOZ– iShares Core ASX 200 |
| US Market | NDQ– NASDAQ 100 ETF IVV– iShares S&P500 ETF |
| Global ETFs | VGS– Vanguard MSCI Index International Shares ETF VDHG– Vanguard Diversified High Growth ETF IOO– iShares Global Top 100 ETF |
| Other sectors | QAU– Gold ETF ETHI– Global Sustainability Leaders USD– US Dollar ETF VAP– Vanguard Australian Property ETF |
The more specific an ETF is, the less diversification it will have and therefore the more market risk it will be exposed to. For example, an ASX 200 ETF will include the top 200 Australian stocks which include a variety of companies in both size sector. This will offer you large diversification and you should have more steady returns. If you invested in a gold ETF, this only tracks the price of gold so if that were to fluctuate than your investment would too. Therefore a gold ETF potentially has slightly more risk as it is focussed on one product. If you wanted even more diversification and an even safer ETF, you may look at a global ETF that has companies from all around the world as well as from different sectors. It is important to do your own research before buying any investments to see what suits you best.
Where Can I Learn More?
There are a few large companies who provide a large range of ETFs. Three of these big companies are Vanguard, Blackrock, and Betashares. Each have a broad selection of ETF’s that track indices, sectors, emerging markets, property and more. Some also offer geared ETF’s, managed funds and other products that may interest you. It is definitely worth having a look at their websites to see if any ETF’s appeal to you. Most of these ETF’s will be available on the ASX (Australian Securities Exchange) and you should be able to find them through your broker.
Mind Over Money 