ETFs are the perfect introduction to the sharemarket - here's why
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.
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:
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:
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?
What risks should I be aware of with ETFs?
Got any questions about ETFs you want answered? Let us know in the comments below.
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