It’s the phenomenon that has investors jumping on board at lightning speed.
Australian-listed Exchange Traded Funds (ETFs) now hold more than $100 billion in funds under management, according to one of the nation’s leading ETF managers, BetaShares.
ETFs grew by $33 billion over 2020 to $95 billion, which was the biggest yearly increase on record.
So, what is an ETF? What are their pros and cons? And how do you invest in one?
What is an ETF?
ETFs are investment funds traded on an exchange, like the Australian Securities Exchange (ASX), and are made up of a bundle of securities such as shares, cash and bonds.
They enable investors to buy a basket of shares or assets in a single trade and are a simple way to diversify your portfolio, even if you are a beginner investor.
BetaShares chief economist David Bassanese said ETFs are an effective way to spread your risk and are attractive to investors who don’t have the time or inclination to watch the market like a hawk.
ETFs automatically cut exposure to a particular stock if it starts to fall, he said.
“AMP and Telstra were once considered good, blue chip, long-term share holdings, which really had very precipitous falls over a number of years and it caused a lot of capital destruction in people’s portfolios if they regarded those as set-and-forget, long-term investments,” Mr Bassanese said.
“We would definitely suggest getting diversified exposure through an ETF unless you are a very savvy stock picker and you watch the market very closely.”
How can I invest in ETFs?
You can buy units in an ETF the same way you buy and sell shares, so you need to set up a trading account to get started.
Or you could go down the micro-investing route by using a mobile app like Raiz Invest (formerly Acorns), which invests your money in a mix of ETFs in accordance with your selected risk profile.
This is a simple way to start investing if you don’t have a chunk of cash up front, as you can start with as little as $5 and either make lump-sum contributions, recurring investments, or have purchases rounded up to the nearest dollar and transferred to your Raiz account.
But make sure to take into consideration account fees as well as average annual returns when determining which fund to invest in.
You can find a list of ETFs and compare their performance on websites like Morningstar.
ETFs tracking the technology sector have been star performers in recent times, supported by demand for new solutions as the world adapts to the pandemic, according to BetaShares.
BetaShares chief executive Alex Vynokur said this year he expected healthy demand for ethical investments, with people opting for less reliance on fossil fuels and stronger corporate governance.
“We expect ethical ETFs will continue to set a strong pace in 2021, with more ethical products to be launched to tap into investor demand,” he said.
“The increased interest in socially responsible investing coincides with widespread and growing concern around the environment and global warming.
“This interest is likely to continue as the global economy emerges from the COVID-19 pandemic.”
Invest for the long term
Although ETFs can help you diversify your investments they are not without risk, because the market or sector they track could fall in value.
Mr Bassanese said investors can lose money if they get cold feet and sell when the market falls over the short term.
“You can get spooked and sell out at the wrong times and if you keep doing that you can chew up your capital,” he said.
“You have got to have the intestinal fortitude to deal with the volatility that can sometimes arise in the market.”