What is an ETF and should I be using them?
If you’ve started your journey into the world of investing, you’ve probably seen the term ETF but what is an ETF and why is it gaining so much attention in the investment community? In this piece, we take a look into everything you need to know about ETFs, from how they work to whether or not they could be a useful addition to your financial life.
What Does ETF Stand For?
ETF stands for Exchange-Traded Fund. An ETF is a type of investment fund that usually follows a specific market or sector, like a stock index. It aims to match the performance of that index. You can buy and sell ETFs on stock exchanges during the day, just like regular stocks. This bundle can be bought and sold on the stock market, similar to individual shares of a company. Instead of selecting individual stocks, an approach that can be as tricky as picking the right horse in a race, you’re investing in a diverse range of assets all at once.
How Do ETFs Work?
An ETF operates by tracking a specific index, commodity, or asset class. For instance, an ETF might aim to replicate the performance of the ASX 200, which represents the top 200 companies on the Australian Securities Exchange. When you invest in this ETF, you’re effectively buying a tiny slice of all those companies, allowing for a diversified investment without needing to purchase each stock separately.
Why Should You Invest In ETFs?
Diversity
One of the biggest advantages of ETFs is diversification. By investing in an ETF, your money is spread across multiple assets, which can help avoid risk by putting all of your eggs in one basket. If one stock in the ETF underperforms, others may balance out those losses.
Cost-Effectiveness
ETFs tend to have lower fees compared to actively managed funds. Because many ETFs are passively managed—meaning they simply aim to track an index—you won’t incur high management fees. This cost-effectiveness can significantly enhance your overall returns over time.
Liquidity
ETFs are traded on stock exchanges, which means you can buy and sell them during market hours just like individual shares. This liquidity provides greater flexibility in your investment decisions, allowing you to react quickly to market changes if necessary.
Transparency
Most ETFs regularly clearly show their holdings, giving you clear insight into where your money is invested. This transparency can help you make informed decisions and feel more secure about your investment choices.
How Do I Invest in ETFs?
If you’re interested in getting started with ETFs, the process is pretty straightforward. Here’s a step-by-step guide to help you.
Open a Brokerage Account
To invest in ETFs, you’ll first need a trading account with a brokerage. There are a number of options available in Australia, so take your time to research and choose one that aligns with your investment style and goals.
Research ETFs
Once you have an account, it’s important to research different ETFs to see which suits your portfolio best. Consider your investment objectives: Are you interested in Australian shares, international markets, or specific sectors like technology or healthcare? There’s an ETF for nearly every investment theme, so find one that suits your interests.
Place Your Order
After choosing an ETF, you can purchase it just like a stock. Decide how many units you want and place your order through your brokerage platform. Be mindful of the market conditions, as prices can change throughout the day.
Monitor Your Investment
It’s key to regularly check in on your ETF’s performance. While investing is typically a long-term strategy, knowing what is happening with your ETFs can help you make timely decisions if needed. Setting up alerts or reviewing your investments in a scheduled manner (for example every three months) will give you the best understanding of how your portfolio is performing.
Understanding the Risks
While ETFs offer many pluses, it’s important to remember that they are not all making people profit. Like all investments, ETFs are subject to market fluctuations that can impact their value. Understanding the underlying assets and your risk tolerance is crucial before diving into any investment.
Summary
ETFs represent an excellent opportunity for beginner investors.. They offer a blend of diversification, cost-effectiveness, and liquidity, making them an ever growing popular choice for many. With the right level of research and understanding ETFs can be an excellent alternative on how to use and potentially grow your savings.
Here at the GLOSS Vault, we have made it our mission to help as many people like you across Australia and New Zealand feel in control of your money and ensure you’re getting the most out of it. To find out more about us and what we do click here. If you’d like to see our app in action for yourself head here!