We ran through Google’s most common questions on ETFs, to answer the most frequently asked questions about the asset class.
Why should I buy an ETF?
Exchange Traded Funds (ETFs) are a simple way of investing while keeping fees at a minimum. ETFs may provide an easy way for you to diversify across different stocks, commodities, bonds, or other securities.
They can also make tax reporting relatively easy, and as exchange traded products – entry and exit is simple and straightforward.
ETFs may be right for you if you want an investment portfolio that tracks market performance, is low-fee, diversifiable, and doesn’t require a lot of effort to maintain.
Whilst trying to outperform the market can seem attractive, Standard & Poor’s (S&P) SPIVA report for mid-2018 revealed that over 80% of traditional Australian fund managers have underperformed the index over 15 years. The results are even worse in the US where 92% have delivered lower returns than the S&P 500 index.
Are ETFs a good investment?
Like all investments, there will be ETFs that perform well over time, and there will be ETFs that perform poorly over time.
The performance of ETFs will probably be distributed in a less volatile range than most asset classes however, meaning that there will be less that deliver extremely poor performance, and less that deliver extremely good performance.
The advantage of ETFs is therefore that you can use them to achieve an exposure (such as to a share market index, commodity, currency, or bond), whilst avoiding some specific risk that may arise when investing in a stock.
What is the difference between a stock and an ETF?
An ETF is a fund that most likely tracks an index, such as a stock or bond index, and does so usually by holding the assets that make up that index. The fund is usually therefore a basket of different securities.
A stock is an individual security that represents a share of ownership in the company that issued the security.
Can you make money with ETFs?
Like most assets, you will make money with an ETF if the traded price of the ETF rises, and you will lose money if the traded price of the ETF falls.
The price of the ETF will almost always rise and fall with the value of the assets that make up the fund.
Are ETFs Safe?
ETFs like all financial products do experience some degree of risk. However, ETFs may face lower specific risk than a particular stock.
Do ETFs pay dividends?
The vast majority of ETFs pay dividends.
Are ETFs good for beginners?
ETFs can be a good product for beginning investors as they are often a low-cost way to achieve a diversified investment, without necessarily having to put in the amount of research necessary with stock picking a portfolio.
Are ETFs good for long term?
ETFs are great for long-term investing. Most ETFs track an underlying index, and as the index updates, so will the ETF. Automatically. Without the investor having to do anything.
This can be extremely beneficial, as most indices update to include assets once they grow above a certain valuation and drop off assets as they fall below a valuation. In this way, they automatically pick winning stocks, and drop losing stocks.
This will also save the investor time and money, and they won’t have to do the research and make the decisions themselves, and the costs for the ETF are likely to be lower than the transactions made by the stock-picking investor.
If you are planning a long-term ETF investment, as many ETF investors are, it will be beneficial to carefully consider the above factors when determining which ETF is right for you. If you have any questions, please don’t hesitate to contact TradersCircle advisor Sam Green on 03 8080 5788 or at sam.green@traderscircle.com.au