What are ETFs (Exchange Traded Funds)?
What are they?
An ETF or an Exchange-Traded Fund is an investment fund that holds a basket of assets. Meaning that by investing into an ETF, you are exposed to many investments all at once.
Think of an ETF like a big box of toys – each toy inside is a different company.
If you buy an ETF (box of toys), inside there are:
- Car (Company 1)
- Doll (Company 2)
- Ball (Company 3)
- Bear (Company 4)
If most companies do well = your box of toys is worth more
If most of them do badly = your box is worth less
If one toy breaks or goes bad, you still have lots of others or you can swap it out for a good toy
So it’s safer than just picking 1 type of toy (or one company).
We know overtime, the best toys will go up in value.
Most ETFs aim to track an index. An example of this is VAS which tracks the ASX200 – so you’re effectively investing in Australia’s 200 largest companies. We know over time that the Australian economy or the 200 largest companies will be worth more increase in value. If we invest into this ETF, we should see a healthy return – even if some companies don’t do well.
If we invest in 1 company and they don’t do well – then we will lose money.
Pros and cons of ETFs
Pros
- Diversification – reduces risk rather than picking single shares
- Low fees – cheaper than managed funds
- Liquity – buy/sell anytime the market is open
- Transparency – you know exactly what you are invested into
Cons
- You get market returns – not “outperformance”
- Market volatility The market can go up and down – if you sell while it’s down – you lose value
- There are risks involved with investing
Is it right for me?
If you have extra money you want to invest into something low cost, low risk with strong returns (better than anyone else can get you over the long term) and can keep it invested through market volatility (7-10+ years investment horizon) – then ETFs are for you