There are plenty of options available to grow your wealth. For instance, you could buy shares in a company, purchase an investment property, invest in cattle or start your own business. However, none are as accessible, easy, inexpensive and tax effective as Exchange Traded Funds (ETFs).
An ETF is a type of passive fund that holds multiple assets which attempt to track the performance of theseunderlying assets. Sounds complicated, but let’s break it down…
- You can think of an ETF as a basket with many eggs in it. The “underlying assets” (or eggs), which are being tracked, are usually given away by the ETF’s name. A Gold ETF tracks the gold price and a US Technology ETF tracks all the US technology companies.
- “Being tracked” means that the ETFs are trying to mimic the performance of underlying assets as close as possible. The ETFs do this by holding assets that match the demand and supply of the assets they are trying to track.
- “Passive fund” means there isn’t a person or company that is actively making lots of decisions and buying and selling these assets on a daily basis, but rather a predetermined formula and the forces of the market will determine the investment mix. ETFs are cost-effective, diversified and can be placed in a Tax Free Savings Account, which is why they’ve exploded in popularity.
Should I construct an ETF portfolio?
Every month a new ETF tracking a market, sector or asset is offered. This makes it a struggle to decide which ETFs to buy. So instead, many invest their money in actively managed funds. Unlike an ETF, active funds have active portfolio managers who have access to a lot of information and research. For a fee, they’ll manage your money and many do a great job! However, when the fee is sizable and the active manager isn’t performing well, an ETF portfolio (a combinations of ETFs) would be a better option.
Globally, active managers have found it difficult to outperform the return generated by ETFs that passively track certain assets over the long run. Lower returns and higher fees have pushed many to constructing lower cost ETF portfolios. If you are comfortable with making investment decisions and want to be hands-on with investing your money, constructing a simple, passive ETF portfolio would be the way to go.
A simple ETF portfolio is the easiest way to go about managing your money. You don’t need to do research on a single share, which saves a lot of time. You’re spreading the risk because though you’re buying a single ETF, there are many shares within it – like a basket with many eggs.
You’re going to want to find an ETF provider. Here are the ones in SA: 1nvest, ABSA, Ashburton, Cloud Atlas, CoreShare, First Rand, Satrix and Sygnia. You can choose one of these or use a platform like Easy Equities (or one of the big bank’s trading platforms), which has all the providers listed.
Which ETFs do I select?
Although being able to invest in anything in the world is great, it’s slightly daunting. The first step is to decide on an ETF portfolio, which will eventually contain a number of ETFs, not just one. The following table indicates the ETF portfolio you should choose depending on your investment term/length. The investment term/length needs to line up with your goals. Is your goal to invest for retirement or to go on an overseas trip in two years’ time?
You’ve selected the ETF portfolio that suits you. Now the difficult part comes: deciding which ETFs fit into this portfolio. You’d need to select a few to construct a diversified portfolio. In part 2 of our ETF Series, we’re going to discuss this and give examples of real ETFs you could buy today.