If you don’t know much about investing or sharemarkets, it can be hard to know where to start. The masses of information available on companies and investing strategies can be overwhelming.
That’s why it can be helpful to start out with something simple like an exchange-traded fund, also called an ETF. One of my first sharemarket investments was in an ETF, and recent data shows many other Australians are investing similarly.
There is now $11.4 billion (as at the end of May) in these kinds of products in Australia, and that’s from an entire sharemarket worth around $1.5 trillion.
An index strategy is also what investment guru Warren Buffett has recommended a trustee use for his wealth once he has departed this world.
In his latest annual letter to shareholders, the Oracle of Omaha said he had laid out clear advice in his will:
“Put 10 per cent of the cash in short-term government bonds and 90 per cent in a very low-cost S&P 500 index fund.”
Exchange-traded funds are essentially a little piece of all the major companies in an index, rolled into one unit. They are like an index fund listed on an exchange. So if you’re buying an ETF over the ASX/S&P 200 – the SPDR S&P/ASX 200 – you’re buying a piece of the biggest 200 companies listed on the local market. That piece will cost you around $52 a unit.
The other good thing about using an ETF strategy to start out is that it makes asset allocation a whole lot easier. If you want to invest in the US market, for example, but don’t know where to start, you can invest in a US ETF listed on the Australian exchange. For around $210 a unit, you can have a piece of the iShares Core S&P 500 ETF (IVV). That, and the iShares S&P Global 100, are the two next largest ETFs on the Australian market after the SPDR S&P/ASX 200 fund, according to the latest monthly review from BetaShares.
If you like gold, but don’t like paying for its storage, there is the ETFS Physical Gold ETF.
Other ETFs you can add to your portfolio include over 20 international ETFs, which cover separate markets such as Hong Kong or Japan, or regions like Asia and emerging markets. There are cash and fixed-income ETFs and products that offer currency exposure.
You can buy them all through your online broker. A full list of what is available is on the ASX website.
It’s not a failsafe strategy. If the US market falls, your ETF will fall, if the Australian market falls, your ASX 200 ETF will fall too. But these big picture factors are generally easier to understand for the novice investor.
As a beginner, you will want to stay away from some of the synthetic ETFs. There aren’t too many of these in Australia, but they do exist and use derivatives to try and recreate, or mimic, an index, rather than investing in the shares in the index itself. A good general rule for investing is, if you don’t understand something, don’t invest in it. So if you can’t understand what, exactly, an ETF has in it, steer clear.
In the same way, make sure you understand the index your ETF is being invested against.
Some of the smaller ETFs may also not be as liquid as some of the larger ETFs – which means it may be harder to buy and sell units in those products when you need to. And international ETFs may incur foreign tax, so read the product disclosure statement before you invest.
Overall, they are a pretty good tool for becoming familiar with the market. And that's a good start.