There is a lot of talk about Exchange Traded Funds (ETFs) lately. Some people seem to think that they are the best thing since sliced bread, while others (mainly stock picking prodigies) believe that they are a terrible investment choice. So, what’s the truth? Are Exchange Traded Funds good? In this blog post, we will take a closer look at ETFs and determine whether or not they deserve a spot in your portfolio.
What exactly are Exchange Traded Funds?
They might sound intimidating but simply put, Exchange Traded funds (ETFs) are investment vehicles that track an index, a commodity or a group of assets. An example of this is the A200 Index fund by BetaShares, This ETF tracks the ASX200 which is made up of Australias 200 largest companies such as BHP, Commonwealth,etc.
One of the awesome things about Exchange traded funds is that they can be bought and sold just like stocks on stock exchanges, this is unlike a managed fund which you will need to approach outside of the market. Because ETFs track an index they provide investors with exposure to a broad range of stocks and allow for easy diversification. Think of it as not trying to find the needle in the haystack by picking one stock but buying the whole haystack!
ETFs have become really popular in recent years due to the low fees they charge and a lot of them also pay dividends. The fact that it is so easy to buy and sell ETFs and the fact that most of them pay dividends or distributions makes it perfect for investors to buy, hold and collect their dividend income.
What are the advantages of Exchange Traded funds?
Low costs
ETFs have low management fees when compared to managed funds. This is because there is no active management of the fund, instead, they are passively managed just by buying and selling stocks in line with the index. Because there is no active management of a ETFs portfolio it means that the fund can have lower operating costs. Looking back at our A200 Example, that fund charges 0.07% Per Annum as a management fee. This is incredibly low when compared to some Managed funds that charge over 1%!
Diversification
ETFs offer investors incredible diversification because they hold a basket of assets. Through one trade you can gain access to hundreds (if not thousands) of underlying stocks. This diversification means making decisions on what stock to buy are so much easier – there are investors out there that simply buy the same ETF every month.
Liquidity
ETFs are really liquid investments, this means that you can buy and sell them easily on the open market.
Transparency
ETFs are transparent investments, meaning you know exactly what’s in the fund and how it’s performing. For instance, if you invest in the NASDAQ 100 ETF you know that that fund holds shares in all of the companies listed on the NASDAQ index. All ETF providers will outline on their websites what holdings they have and what percentage of the fund it equates to.
What is the downside of ETFs?
While I think that the benefits of Exchange Traded Funds definitely outweigh the negatives there are still some you should keep in mind.
Some Lack of Diversity
Depending on the ETF you are looking at investing in it may not provide diversity to the exact market you want to invest in. In saying that, there are new ETFs coming out basically daily that are ‘Thematic ETFs’, these funds track a theme like robotics, cybersecurity, or even crypto!
Slow Growth
ETFs aren’t going to be for the YOLO yelling, Lambo wanting, Moon seeking crowd. ETFs (and indexes) move a lot slower and provide returns of between 5-20% per annum. For those of us that subscribe to the ‘Get Rich Slow’ mantra that is slow and steady wealth creation, ETFs can be the perfect vehicle.
Are ETFs safer than stocks?
ETFs are not a guaranteed return on investment, you can lose money on ETFs just as you can lose money on individual stocks. But.. with the diversification that ETFs provide there is a lot of margin for safety. Remember ETFs represent the underlying investment, so if the market crashes and loses 50% you would expect your ETF to reflect this drop.
The key to remember is that if the market does decline this could be the perfect time to invest in the market and pick up some ETFs are a discount. Always be sure to seek professional advice if you are looking to invest.
Can I sell my ETF anytime?
Yes, you can sell an ETF at any time while the market is open. ETFs have an ‘open ended’ nature, meaning that the fund itself will buy back the investor’s shares. For the investor, this is great because it means you do not have to wait for someone else to be buying.
How long do you hold ETFs?
Well, this question can only really be answered by your personal investing goals and plan. But personally, we look at investing as a long term thing. We aren’t here to day trade our way to wealth, mainly because we tried that.. and we didn’t end up making any money at all haha.. let’s not talk about it ok!
If you can afford to leave your ETF investments in the market long term and allow them to continue compounding for the next 20-30 years you will really reap the rewards. Just remember that Rome wasn’t built in a day and neither will your wealth, it’s a marathon not a sprint!
Do ETF pay dividends?
This question really depends on the specific ETF you are looking at investing in. But in general, a lot of ETFs will pay dividends in line with their underlying holdings. For instance, Betashares A200 fund currently has a Dividend Yield of 5.4%.
Conclusion
So, are exchange traded funds good? The short answer to this question is yes. ETFs are great investment vehicles to grow your wealth, especially if you are looking for a diversified portfolio that doesn’t require constant monitoring. ETFs suit new investors and experienced investors alike, they are a great choice if you are looking for an investment that will generate steady returns over the long term.