The buzz around Exchange Traded Funds (ETFs) seems relatively new, but did you know that ETFs have been around for more than 25 years?
The first ETF was launched by State Street Global Advisors in 1993, with the introduction of the Spider (SPDR). Back then, ETFs were used by institutional investors for sophisticated trading strategies. But when individual investors caught wind of it, they also wanted a piece of the action.
Soon enough, ETFs were demanded by both financial advisers and individuals because they could offer diversification in a single investment.
According to independent ETF data provider, ETFGI, the global ETF industry has 5,489 ETFs in 56 countries with assets valued at USD4.746 trillion to the end of March 2018.
What are ETFs?
ETFs are funds that trade on a stock exchange. Every ETF is different, for example some invest in a broad range of assets, while others focus on just one sector. Typically ETFs aim to replicate the performance of an index or benchmark (passive management approach), however some ETFs adopt an active investment management approach.
Investors don’t own the individual assets in the ETF, they simply purchase units in the fund.
Benefits of using an ETF
There’s an abundance of ETFs now available for investors, ranging across different asset classes, such as bonds, property, and shares, and also geographic locations.
Investors can potentially achieve diversification in a cost-effective way by investing in multiple companies and other investment types, all in one go.
With a high level of transparency, you can view the underlying assets of the ETF easily.
One of the biggest benefits of ETFs is the ability to buy or sell them on the stock exchange. Your money is generally available two business days after the date of sale.
Things to consider
Commission and brokerage fees. These are paid every time you buy or sell an ETF on an exchange.
Diversification is a big drawcard for ETF investors, but this may not protect investors from market volatility.
If you need to turn your investment into cash quickly this may become an issue if an ETF is lightly traded on the exchange and there are no buyers when you wish to sell.
You will also need to understand the tax implications of ETFs. Be sure to seek tax advice for your own situation.
Be informed and know your limits
Like any investment you need to ensure that investing in an ETF is right for you. Make sure you understand, including but not limited to, your investment goals, how much risk you are comfortable with, and how long you want to invest.
How can I buy an ETF?
ASB Securities’ Online Share Trading platform allows investors to buy and sell ETFs on the New Zealand and Australian stock exchanges. To find out more about how to join the ASB Securities Online Share Trading platform, click here.
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This article provides general information only. The information is not advice and does not have regard to the financial situation or needs of any reader. As individual circumstances differ, you should seek appropriate professional advice.