If you’ve spent any time at all looking through the business section of a newspaper or taken any notice of the financial news on TV you’ve probably heard them mention ETFs or Exchange-Traded Funds. They’re becoming more and more popular each year. Basically, an ETF is an investment fund that tracks an index (could be stocks, bonds, etc) and is listed on a stock exchange.
An exchange traded fund is much like a managed mutual fund except it simply tracks or replicates an index (the 50 largest stocks in a market for example) and charges much smaller management fees. No stock picking wizard demanding an exhorbitant wage to buy and sell stocks means an ETF costs a whole lot less to run. So you might be paying something like a 0.14 percent management fee for an ETF tracking the top 300 companies listed on the Australian Stock Exchange but a whole lot more for an actively managed mutual fund that probably wont beat the index anyway!
Why are ETFs Good?
Well, they’re a cheap and easy way to be invested in a market. You don’t have to be an expert stock picker to be invested in an ETF. Just choose the markets you wish to invest in and buy them like any other stock market listed companies.
It also means you’ll be diversified without having to come up with a large chunk of money to get started. Just like buying any other company on a stock exchange you can buy an ETF following the MSCI World index of more than 1600 companies from more than 20 countries for as little as $500. Obviously you don’t have to spread your risk as wide as 1600+ companies but that option is there if you wish to take it.
Why are ETFs Bad?
If you’re a master at picking stocks then diversification will cost you money, but for mere mortals there isn’t much to complain about with exchange traded funds. Mutual fund managers don’t like them as billions of dollars are being pulled out of their actively managed and expensive funds to be put into more passive ETFs.
With their popularity and rapid growth there are now all sorts of exotic ETFs that follow all sorts of weird and wonderful indexes but that’s just the financial industry doing what it does best: screwing everything up and making it complicated so they can charge you more money. Stick with everyday vanilla ETFs that hold physical assets and follow known indexes for minimal managements fees and all should be well.
Conclusion
I don’t give investment advice so I can’t tell you what to do. I’m just sharing information and showing people what I’ve done and what I’m doing. I think they’re a great way to diversify. I still invest in individual stocks but also have a diversified base of ETFs that cover companies in markets that I believe will grow for many years to come.
Leave a Reply