It is hard to believe there are 2000+ companies listed on the Australian Stock Exchange (ASX) – so how do you choose which one is right for you?
Imagine you have never bought a chocolate bar before – how would you know which one to choose? Snickers, Cherry Ripe, Mars, Milky Way…. the list goes on. They are all similar, but all different too. Is one better than the other? How would you decide which one to eat? Instead – you might choose a box of “Favourites” so that you get a little taste of a variety of chocolates all in one, without having to choose between them.
Is there a stock market equivalent of a box of Favourites? YES, there is – they are called Exchange Traded Funds (ETFs)!
What is an ETF?
An ETF is a basket of investments that trades just like individual shares and they can be easily bought or sold on the ASX. ETFs combine the investment advantages of a managed fund, with the ease and cost-effectiveness of stock investing. ETFs allow investors to gain instant diversification and exposure to a range of assets, in a single trade.
What Are The Benefits of ETFs?
- Low Cost – ETFs are a low-cost investment, offering substantial savings on buying a large number of individual shares.
- Diversification – ETFs provide broad exposure to entire sectors, asset classes or multi-asset class investments that offer all-in-one investment solutions.
- Tax Efficiencies – ETFs generally have a low turnover, minimising capital gains and improving long-term performance.
- Liquidity – You can buy and sell ETF units easily and quickly on the ASX.
- Transparency – ETFs are highly transparent investments that provide full visibility on their trading price, their investments, and costs.
Just like chocolate bars, ETFs come in different shapes and sizes….there are ones that focus on sectors of the market. Market strategies, global indices and sectors, emerging markets, infrastructure, property, currencies, fixed income, cash, commodities, and ethical investments. There is an ETF to suit almost any appetite!
How Popular Are ETFs?
ETFs are gaining huge popularity among Australian investors.
Interestingly, the combined value of Exchange Traded products rose 53% to $96.5 billion over the year to end-February 2021 according to ASX data. And the average monthly ETF transactions soared 151% over the previous year as more investors are recognising the benefits of these products.
ETFs have become share market building blocks for many investors because of their easy access, low cost, and broad range of investment options.
An Example
ANZ, Bendigo, NAB, Macquarie, Bank of QLD, Commonwealth, Suncorp, and Westpac, all form the largest banks in Australia. You could choose to invest in each of these companies separately. Or alternatively, you could invest in a “Banks ETF” that provides exposure to all these companies in a single investment.
Pfizer, Moderna, AstraZeneca, Johnson & Johnson, CSL, Glaxo Smith Kline…. Just a few of the giants of the International Healthcare space. Instead of choosing between these companies, there is a Global Healthcare ETF in which you could invest. Gaining exposure to each of these companies.
Just like shares, there are also risks to investing in ETFs. The market or sector that the ETF is invested in could fall in value, which in turn would see the value of your ETF investment fall. Dividend payments for ETFs will also vary and there is no guarantee that past performance will guarantee future performance.
A full list of available ETF products listed on the Australian Market can be found on the ASX website at the following link: https://www2.asx.com.au/markets/trade-our-cash-market/asx-investment-products-directory/etps
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