I have a confession to make. I am a big fan of chocolate, bubbles and exchange-traded funds (ETFs). What I especially love about ETFs is how they’ve revolutionised investing, allowing more Australians to get into asset markets even when they don’t have much cash to invest.
ETFs are simple, accessible and affordable. And with well over 300 to choose from, it’s possible to build a well-diversified portfolio using ETFs alone. Here’s a closer look at what’s involved and how to get started.
What is an ETF?
ETFs are a type of managed investment fund. They pool the money of like-minded investors and invest it in a specific asset class. This is where ETFs tick the box for simplicity.
As the name suggests, “exchange-traded” funds are listed on the Australian Securities Exchange (ASX — the Aussie share market). That means investors can get started with as little as $500, which is the accessibility advantage of ETFs.
What really sets ETFs apart is that most (though not all) are passively managed “index” funds. Instead of trying to beat the market, they aim to match a particular market index. This cuts costs considerably, bringing affordability to investors. As a guide, ETFs can have annual fees below 0.05%, meaning more of your money goes to work earning returns.
Steps to build an ETF portfolio
With so many ETFs to choose from, the hard part is knowing which ones to invest in. It’s a very personal decision. The key is to understand two things: how comfortable you are with risk and how long you plan to invest.
Shares, for example, are a higher-risk investment, though the trade-off is higher long-term returns. So, if you’re happy with the level of risk involved, and you plan to invest for at least five years (preferably longer), you may want to have an Aussie shares ETF at the heart of your portfolio.
From here, you can mix and match ETFs as you choose.
The Australian share market represents a fraction of global markets so it can make sense to add an international share ETF to your portfolio. This brings extra diversification, plus access to major companies like Alphabet (owner of Google) that aren’t listed on the ASX.
If you’re keen to earn steady and reasonably stable returns, you may want to invest in a fixed-income ETF, where the underlying asset is often government bonds. From here, you could add ETFs that focus on specific commodities, such as gold. More recently, a Bitcoin ETF has launched on the ASX.
It’s all about finding the blend of ETFs that can help you reach your goals.
How to find the right ETFs
There is no right or wrong way to blend your ETF portfolio. What matters is that you take the time to understand what an ETF invests in and think about whether it is a good fit for how you feel about risk, your personal goals and your long-term plan.
I realise this can all seem a bit overwhelming. Fortunately, InvestSMART (who I sit on the board of) has developed a handy online ETF Filter. It can help you narrow down the choice of ETFs using a variety of options. The filter is easy to use and can save a lot of time compared to trawling through ETFs listed on the ASX.
Three ways to invest in ETFs
If you’re new to investing, it’s perfectly natural to be unsure about how to buy units in an ETF. The good news is that the Internet makes it easy.
There are three main ways to invest in ETFs, and they can all be completed online with a few keystrokes:
1. Use an online broker
Most investors choose an online broker such as CommSec, nabtrade or CMC Markets to buy/sell ASX-listed investments (remember, this includes ETFs). Brokerage fees are very low across almost every online broker. So, the thing to watch for is how comfortable you feel with the way a broker’s platform works. Check out a few to see which one you feel at ease with.
2. Invest directly through an ETF provider
Alternatively, you may want to invest in ETFs directly. Several ETF providers offer this option. With Vanguard, which is a leader in ETFs, you pay zero brokerage as long as you buy a Vanguard ETF. Betashares, another ETF provider, offers Betashares Direct, which lets you invest in ETFs — whether from Betashares or other ETF managers — and pay zero brokerage.
3. Buy into a ready-made portfolio
Robo-advisers like InvestSMART and Stockspot have a variety of ready-made portfolios made up of various combinations of ETFs. The beauty of this option is that your portfolio of ETFs is continually rebalanced so that it always fits your level of comfort with risk.
What to watch out for when choosing ETFs
Building a portfolio made up of ETFs is super-easy, though one issue to be aware of is overlap. This happens when a number of ETFs invest in the same or similar shares, and it can lower diversification and increase risk.
The simple way to avoid — or at least reduce — overlap is to check out the major shares or assets an ETF invests in. You can find this information on the ETF provider’s website.
A little time spent looking into the details of an ETF can help you gain an understanding of what you’re investing in — and how an ETF can fit into your portfolio. You may not share my love of chocolate or champers, but you may love ETFs! You could be amazed at how easy they make it to become an investor.
Disclaimer: The information is correct at the time of writing. Any advice provided is general in nature and does not take your personal circumstances into consideration. Readers should seek their own financial advice.
This article originally appeared in the September 2024 issue of The Australian Women’s Weekly. Pick the latest issue at your local newsagent or subscribe so you never miss one!
