How to choose an ETF
So, you’ve managed to save some money and you’re looking to take the plunge and start investing.
If you’ve been reading about investment options online, or watched our video and read the investment blog from last week, then chances are you will already know about Exchange Traded Funds (ETFs).
ETFs are one great way to start investing in shares through a diversified approach and you won’t need thousands of dollars to get started.
But with hundreds of ETF options available, having a good idea about how to choose the right ETF for you will help you go from reading to trading.
Set up an online share trading account
Because Australian ETFs are traded through the Australian Securities Exchange (ASX) you will need an online share trading account to buy and sell them.
The good news is that it is relatively easy to set up an online trading account and most large Australian banks have a trading platform so you may be able to open a trading account already linked to your bank account.
However, different trading platforms will charge you different amounts to buy and sell. The big banks don’t necessarily have the cheapest platforms so it pays to shop around; for more information on the fees, trading options and support features of the different trading platforms, check out a comparison site such as Finder or MOZO.
For more information about setting up an account, check out Module 6 of Verve’s Money & Mindset Program.
Be clear on your investment objectives and timeframe
Before you make an investment, it’s good to have a plan. Think about how much money you want to invest, how long you want to have your money invested, and what your appetite for risk versus potential returns is.
Create diversification from the get go
One of the useful aspects of ETFs is that you are buying into a fund that holds lots of different investments so there is already a degree of diversification and this limits the risk associated with having “all your eggs in one basket”. Not sure how ETFs support diversification? Read more here.
However, you still need to think about Diversification as the holdings of some ETFs are significantly more diversified than others.
To reduce the risk associated wiht only investing in one sector, look for an ETF that gives you exposure to a range of companies, industries and countries/regions.
When you start looking at ETFs you will see that some are invested quite broadly, for instance an ETF that tracks the top 200 companies on the ASX is a relatively diversified Australian based investment. You will also see some ETFs with a narrower focus, for instance an ETF that only invests in Australian gold companies has a relatively narrow focus.
If you are not experienced and confident in selecting individual industries or geographical regions to invest in, then you may want to consider a broader type of ETF or spreading your money across a few different ETFs.
Let your values inspire your investing choices!
More than ever, Australians want their money invested ethically. The latest research shows that nine in ten Australians expect their super and other investments to be invested responsibly and ethically.
The good news is that there are more options for ethical investing than ever before, and the research is clear –there is no need to compromise your values for strong returns. With ethically invested funds in Australia outperforming the market over three, five and ten year time periods.
There’s a great exercise in this article on investing in line with your values to help give you some ideas about the types of industries and companies you might want to explore from an investment perspective. It also explains important terms that are often used in ethical investing, such as positive and negative screening.
Finding an ETF that matches your goals
CHOOSING AN ISSUER
ETF issuers are the businesses that build and ‘issue’ the ETFs to the public via the ASX.
If it helps, you can think of issuers a bit like furniture shops, while many shops have near identical looking products often made with the same materials, it’s still important to consider the track record and experience of the shop from which you are buying the product. Similarly, it’s important to consider the track record and experience of the ETF provider in managing index investments.
There are over 20 ETF providers in the Australian market supplying over 200 ETFs for investors to use. However, four major players – Vanguard, iShares, Betashares and SPDR – together make up over 80% of the Australian market.
Now that you know some of the ETF Issuers in the market, it’s time to consider the products they have available for you to invest in.
ETFs come in all shapes and sizes and carry different levels of risks with differing track records of returns. For example, while an ETF focused on resource stocks might offer the potential for higher returns, it also comes with a higher risk attached than an ETF that tracks the top 200 stocks on the ASX.
There are a few ways that you can consider how a specific ETF may perform. The first is by selecting individual ETFs on an Issuer’s website and reading through the investment information for the product. You should be able to relatively easily find the returns that the ETF targets, and also see how it has been performing.
At this point, you may start getting overwhelmed by choice (sort of like walking into an IKEA or Freedom furniture without having thought about what Sofa you may want to buy). But don’t worry you don’t need to review every ETF available, I’ll give you some hints on how to narrow your search below. For now, just choose one or two Issuers and a couple of different ETFs and get accustomed to finding the key performance information.
If you aren’t yet ready to make an investment, another way that you can monitor performance is by setting up a watch list and tracking how the ETF performs over time (more on this later).
Just remember that past performance isn’t necessarily an indication of future performance.
FEES and BUY/SELL SPREAD
Considering fees is important as fees can have an impact on performance. Generally, if an ETF is charging higher fees but not demonstrating higher returns, this is something to question.
The Issuer of the ETF will charge a fee to manage the fund. It’s sometimes referred to as the management expense ratio or MER. This fee is generally taken out of the returns on your investment before they are deposited into your account.
So, when you see a statement related to investment performance that says “net of all fees” it means that this is the amount of return you earned on your investment once all fees have been paid. The management fee charged will often depend on whether the ETF is actively or passively managed. Generally, EFTs are passively managed, which keeps management fees to a minimum because there is less human capital required to manage the fund.
You should always read the Product Disclosure Statement provided by the ETF issuer for a full explanation of all fees and costs that will apply.
Remember that trading costs (also known as brokerage fees) are separate from investment management costs and are deducted directly from your online trading account. For a casual investor, many trading accounts offer fees under $20 per trade. It’s important to be aware of this fee as every time you buy or sell shares, you’ll be charged this fee.
Putting all this knowledge together; a back of the envelope approach for considering ETFs
Now that you know about issuers, and you’ve learned how to consider and find information on ethics, performance and fees, it’s time to start doing some comparisons.
If you don’t have a lot of time for comparing ETFs you can start by looking at some of the suggestions provided by comparison websites like Canstar and Finder. Just remember that these websites are businesses themselves and make their money through advertising on their site.
Once you have a shortlist, create yourself a simple table and start comparing. Here’s a checklist outlining a few things to review when you’re checking out an ETF.
❏ Buy/Sell spread
❏ Tracking error
❏ Issuer reputation
I’ve selected an ethical ETF below to show you how I would complete the table. I’ve chosen the BetaShares Global Sustainability Leaders ETHI as Verve members are already invested in this ETF through their superannuation. I’m not suggesting that you buy this ETF, I jaunt want to show you how to complete your table based on a real ETF. The information I have included below is accurate as at the 4th of June 2020.
Tip, downloading the factsheets from each ETF can give you an easier way to digest the information!
Not ready to buy just yet? Create a watch list
You can find the full list of ETFs available on the Australian Stock Exchange here.
It’s a long list, a good way to start to track ETFs which you might be interested in is to create a watch-list of ETFs through your share trading account.
You can use your watch-list to become familiar with a particular ETF, tracking their performance before you decide to invest.
Think of your watch-list like your reading list. It’d be great to buy all the books we want to read at once, but due to budget and time constraints, we generally only buy one or two books at a time.
So go on, add some ETFs to a watch-list and make your own comparisons! We look forward to continuing the discussion and hearing about your investing journey along the way.
This blog is published by Verve Superannuation Pty Ltd (ABN 65 628 675 169, AFS Representative No. 001268903), which is a Corporate Authorised Representative of True Oak Investments Ltd (ABN 81 002 558 956, AFSL 238184), as the Sub-Promoter of Verve Super.
Verve Superannuation Pty Ltd and True Oak Investments Ltd are not licensed to provide personal financial advice. The information contained in this blog, including any financial guidance, is general in nature. You should consider seeking independent legal, financial, taxation or other advice to ensure that your financial decisions are suited to your unique circumstances.
You should read the Product Disclosure Statement, Additional Information Booklet, Insurance Guide, Target Market Determination and Financial Services Guide before making a decision to acquire, hold or continue to hold an interest in Verve Super. When considering financial returns, past performance is not indicative of future performance.