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There is one area of personal finance which yours truly hasn’t really touched on, but has a disproportionate representation in many a FIRE portfolio.
I’m talking of course, about ETF’s or Exchange Traded Funds.
What is it?
An ETF is a type of investment fund which can be bought and sold on an exchange, similar to stocks.
They are split between “active”, which is managed by a fund manager looking to outperform the underlying index or market, and “passive” which track the underlying index or market i.e. achieve market returns.
They were made famous by Mr Buffet who, in 2007 bet $1m that an index fund would outperform a collection of hedge funds over the course of 10 years… a bet he subsequently won in 2017.
Final scorecard: 7.1% p.a. vs 2.2% p.a.
Yep, and that’s why our ETF market is booming, surging 41% year-on-year to almost $60 billion as of Oct 19. Although it is well over $4 TRILLION in the US, Aussie ETF’s are tipped to grow to $100 billion by 2022 and $600 billion by 2030.
The predominant reason of their popularity is because of the low fees, entry and holding costs involved – I mean, I found one management fee as low as 0.07%!
This is because passive funds (more popular) are managed using an index approach, which just tracks along.
Different Types of ETFs?
Literally anything you can think of, there are too many and numerous to count.
The more common ones are:
- Australian Broad Based – covering er… a broad range in… Australia.
- Australian Sector – sector specific… ones.
- Australian Strategy – um, strategy ones?
- International Broad Based – international stuff.
- International Sector – more international stuff.
- Commodity – oh I know this! Stuff such as BHP and RIO and AUD/USD
- Currency – ummm… stuff such as B…BHP and RIO and AUD/USD?
Enough Nancying around TheFrugalSamurai, SHOW. ME. THE. MONEY. You gregarious buffoon.
WOW! S…sorry… um.
So yeah, it um, it really depends on what you want to invest in, which areas, which sectors, what exposure you are comfortable with.
Lucky I have access to a thing called the internet.
And the internet is a good thing.
I like things.
But more importantly, it allows me to find stuff.
I like…OK nevermind.
Here’s what I found:
You could do worse than start there.
How to buy them?
It’s quite simple really, as the same suggests, you buy them from an exchange.
Similar to stocks, most of the main brokers allow you to buy them.
Every investment has risks, these are no different.
So what are the main ones?
Sometimes you can’t keep up with what the underlying ETF is actually invested in.
If it is in smaller companies or emerging markets or even lesser known commodities (Palladium anyone), it may be harder to sell under certain circumstances, or be subject to greater price fluctuations.
This is also the biggest risk in my opinion, in any market down-turn.
As passive ETF’s hug the index, a down-turn in the markets means a fall in your investments, once everyone rushes to get out, it could lead to a spiral of forced selling, further exacerbating the falls.
Depending on what you’re invested in, if the ETF tracks an overseas market, the underlying change of your domestic currency may affect the value of your investment.
Although some funds are currency hedged – which means that they are structured to be ambivalent to currency movements.
Some overseas ETF’s are subject to the regulations of the underlying country, therefore foreign taxes and charges may apply.
Make sure to carefully read any Product Disclosure Statement prior to investing in any ETF, if you are concerned with this, or any other point.
And of course, ETF’s are investments.
Investments have risk.
If you’re not comfortable with the risks, then either a) get educated and more comforted, or b) don’t do it.
Why have them?
But if you are comfortable and want to know where to begin, then check out some quick and easy strategies here.
Although mind you, I’ve heard a basket of ETF’s comprising exposure to:
- Australian domestic shares
- US domestic shares
- International shares excluding US
Is a decent place to start, as it has a bit of everything, local, US, international exposure for the upside and a bit of protection in gold on the downside (why does gold offer protection? Will do a post on this shortly!)
My opinion only of course, please as with everything – do your own research!
To be honest guys, TheFrugalSamurai here hasn’t really been very active with ETF’s (at all).
This is because I actually like poring through company financials and balance sheets in my spare time (HOW BORE-RING).
Which is why I’ve tended to take a more active approach, to try and see if the returns I generate can outperform the index (they can, but barely).
HOWEVER, as soon as it gets too much, or the returns slip behind, I am comforted to know that there is a market which:
- Has low fees
- Consistently delivers positive returns
- Is more or less brainless
- Offers diversification
- Can be automated
Then WOW, you BETCHA I am on it like a dirty rash.
Until then, happy investing!
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