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· Posted on
February 21, 2024

ET(F)? Phone home?

ETFs are the perfect introduction to the sharemarket - here's why

What's the key learning?

  • ETFs are a basket of investments you can purchase on the stock market of privately.
  • With ETFs you can be exposed to different stocks or asset-types with one purchase.
  • Most ETFs are passively managed, meaning they track and replicate an index.
  • Some of the benefits of ETFs include diversification, low cost, and ease of trade.
  • Some of the disadvantages of ETFs include market risk, currency risk, and liquidity risk.

Imagine if a “know-nothing investor” could actually outperform professional investors. Well, the GOAT investor Warren Buffett believes this is possible. And it’s all thanks to ETFs.

ETF’s are a bit like the ramp at a bowling alley; they’re often a pretty useful entry point into the investing game. But unlike the ramp, this ain’t just for the kids. 

So what does “ETF” mean?

ETF stands for “Exchange Traded Funds”. With an ETF, you can invest in one fund (either on the sharemarket or privately) - and that investment vehicle has a range of different assets all at once.

Buying individual shares is like mixing some mango in a blender to make a smoothie. It tastes good.. But it can get a bit boring after a while.

But buying an ETF is like buying the All Berry Bang smoothie from Boost Juice. We’re talking strawberry yoghurt, blueberries, strawberries, apple juices and raspberries. Delicious and a good mix of flavours.

Soooo much delicious goodness

Rather than purchasing one company, you’re effectively getting exposure to a whole mix of companies with just one purchase.

When you invest in an ETF you don’t own the underlying investment (that’s how they differ from stocks). 

You own a portion of the “fund” and the fund provider invests in the actual shares or assets.

The fund does the hard work for you by investing your money, and you pay them a fee for this service.

Types of ETFs you can invest in

ETFs can be categorised in many different ways, and the ones you choose will depend on your goals, your values, and your risk profile. Some examples are:

  1. Industry ETFs which invest in a specific industry like healthcare or technology.
  2. Commodity ETFs which invest in commodities like gold or iron ore.
  3. Currency ETFs which invest in international currencies like the US dollar or the Euro.
  4. International ETFs invest in overseas assets; shares, bonds, commodities.
  5. Ethical ETFs invest in values-driven assets like sustainability focused companies

Most ETFs are passively managed

That means they’re copycats; they track and replicate an index, such as the ASX 200.

Passive ETFs can track indexes like:

  • The ASX 200
  • The NASDAQ 100
  • FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) 

However, there are some ETFs that are actively managed, which means there’s a team of analysts, researchers and professional fund managers who decide which assets to buy and in what proportions.

Their aim is to beat the benchmark index’s returns.

Because actively managed ETFs are more resource-heavy, they also charge higher fees.

Why do people invest in ETFs?

  • Diversification: With ETFs you can buy a basket of shares or assets with one trade. It’s like buying a Favourites box - you get a bit of everything, which spreads the risk.
  • Low cost: Passively managed ETFs in particular have low management fees compared to active investment managers
  • Easy to trade: You can buy and sell ETFs during trading hours just like buying and selling shares on the sharemarket. 
  • The returns: Often these ETFs (which track index funds) actually perform better than actively managed funds. 

What risks should I be aware of with ETFs?

  • Market risk: The specific market or sector the ETF is tracking could lose value eg. if you’ve invested in a tech ETF and the industry falls in value, your ETF investment will go down too.
  • Currency risk: If you’ve invested in an ETF that tracks international assets, the value of your investment will be impacted by changes in currency value. Some ETFs are “currency hedged” to remove this risk.
  • Liquidity risk: Some ETFs invest in non-liquid assets like real estate, which can make it difficult to trade frequently.

Got any questions about ETFs you want answered? Let us know in the comments below.

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