Exchange Traded Funds (ETFs)
Another sharemarket topic! (our favourite). In this episode we chat to Morgans Investment Advisor Brooke Gardener about Exchange Traded Funds. Brooke explains to us what ETFs are, how they differ to regular shares, the benefits/costs/risks involved with investing in ETFs and more!
What are Exchange Traded Funds?
Complicatedly put, ETFs are a collection of securities which track an underlying index. Simply put, an ETF is like a basket of different investments (such as shares). ETFs allow you to invest in many companies at once, tracking stocks either in a single industry (such as energy) or an entire index of equities (such as the S&P ASX 200 which tracks the top 200 companies on the asx).
What are the benefits and risks of ETFs over regular shares?
ETFs can offer lower costs as it only requires one brokerage fee to invest in many companies instead of multiple transaction costs if you were to invest in multiple individual companies. ETFs come at the same risk as buying into individual companies however you are getting average performance and thus often less volatility. It also allows for more diversification as you are investing in many companies (sometimes even across different sectors).
How does buying an ETF work?
It is the same as buying a share! You need a broker (either online or in person) and you can buy and sell at any time the market is open. For example, you can log onto Commsec and search for a particular ETF’s code. Some examples of well known ETFs are VAS (the asx 300), SPDR S&P 500 (tracking the 500 largest companies in the US).
Why do Apps like Raiz use ETFs?
Apps like Raiz use ETFs as they are low cost and therefore allow customers to invest from as little as $5 or $10 instead of large amounts. It allows for broad exposure and they don’t need a manager to constantly be picking funds to be invested in.
How are ETFs treated at tax time? Do they pay dividends? How do they compare to LICs?
Take a listen to the podcast above for more info on ETFs!