What the F is an ETF?

Written By Mikhaila Robertson

There’s a lot of buzz around ETF’s - especially in the “finfluencer” world, but what actually are they?

Are they as good as everyone claims?

Will it really make me a millionaire in the next 50 seconds?

The short answer is: no.

The long answer is: no, but you wouldn’t want to get rich quick - easy come easy go - as they say. ETF’s are a great tool for wealth creation for many reasons but there are also a lot of reasons why they might not be the right fit for you.

The Low Down:

So, what we need to know generally:

  • An Exchange Traded Fund (ETF) is a packet of securities like shares, commodities or bonds that offer greater diversity than buying the same amount of any one of these securities. You can have ETF’s that track certain indices (like the ASX 200, the S&P 500, the Cryptocurrency market and anything in between), track a commodity (oil, electricity, gas) or a sector (Australian Shares, Property, Bonds).

  • ETF’s can be actively or passively managed, meaning the securities within this little parcel can be changed often, or less often.

  • They can be purchased on the exchange (the ASX here) so somewhere like CommSec, NABtrade, or through your superannuation if yours has that ability.

The Good:

  • They can be a great way to diversify your investments for a fairly low entry price (depending on who you go with)

  • They are fairly easy to invest in, and offer a more hands off approach as there is a fund manager involved to do the heavy lifting for you

  • There are lower broker costs involved than if you were to purchase each security individually

The Bad:

  • Like shares, the price changes throughout the day depending on supply and demand. This means that, like shares, they can leave you exposed to losses if you sell at the wrong time.

  • Unlike shares, most ETF’s have fund manager costs

  • They have a lower liquidity (harder to sell quickly) than many investments, meaning you shouldn’t rely on access to these funds for emergencies.

The neutral:

  • ETFs access dividends of the shares held through their parcel

  • Selling ETF’s can trigger a tax liability much like any security

  • Like anything, you risk buying high and selling low.

A lot of the information here can be found on the MoneySmart website.

Mikhaila Robertson
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