Earning money by doing nothing — sounds like the dream, right? And with shares, you can do that, to an extent. But what if we told you there was another way to earn money by doing nothing and that it was somewhat less risky than shares? It’s called an exchange-traded fund or an ETF for short.
Before we get into what exactly an ETF is, know that all investing — even buying ETFs — does involve risk. You aren’t guaranteed to make money and you might lose the money you start with. The below is only general information.
What Is an ETF?
“An ETF is a type of asset that is traded exactly like a share is, so ETFs are bought and sold on an exchange like the ASX,” says Victoria Devine, financial advisor and founder of podcast She’s on the Money. “Its underlying value lies in the fact that instead of purchasing one share in one company, you’re buying a basket of shares, giving you exposure to a whole pool of companies. This means that you aren’t putting all your eggs into one basket.”
“While the first ETFs were launched in the 1990s, they have become far more popular in the last 10 years with the growing interest in passive investing, rather than active investing.
“Passive investing is a style of investing which focuses on buying and holding assets over the long-term, rather than actively trading. This approach is popular because it means that less time, energy and effort are required from the investor. Unlike active investing, with a passive strategy we aren’t trying to outperform the market, instead, we’re focusing on making use of compound interest and dollar-cost averaging to create long-term wealth and, ultimately, achieve financial freedom.”
Adds Brooke Roberts, co-founder and director of investing platform Sharesies Australia: “Think of ETFs like a basket of fruit. You’re at the fruit market and instead of filling up your baskets with only mandarins, you get a basket of pineapples, bananas, mandarins and kiwifruit. Similar to that, an ETF is a pick ‘n mix of companies or funds that meet what you want to invest in.”
“There are all different kinds of ETFs. If you’re particularly interested in certain themes — and that could be anything from robotics to sustainability or healthcare — you can find an ETF that will give you exposure to a variety of companies that fit this interest.
“Another great thing about ETFs for new investors is that you have the confidence of knowing that your money is being managed by a fund manager. So, someone is looking at making sure the ETFs are doing what it said it would do — whether that be tracking the top 500 companies in the US, or investing in the themes you want like sustainability.”
How Is an ETF Different from a Share?
“The buying and selling of ETFs and shares is done in the same place and involves the same process,” says Devine.
“Buying a share means that you are buying into an organisation, which means that you become eligible to receive some of that business’ profits (hello, dividends!) and its capital growth over the long term (this is the profit you make when you sell for a higher price than what you bought at).
“Buying an ETF means that you have bought into a diversified portfolio of up to 500 different assets or shares. You own a part of that ETF pool, rather than owning part of a company.”
Why Should You Consider Buying an ETF?
“ETFs are a brilliant way to get started investing because they are so accessible,” says Roberts. “Some platforms have no minimum investment amount, so you can invest however much you want into an ETF (yep, even 1 cent if you wanted, too), giving you a diversified investment portfolio. It really is about working towards your goals and letting people work towards financial freedom one payday at a time.”
“A lot of places like having ETFs in their investment portfolios. So don’t feel like ETFs are just for beginners. Super Funds and other institutional investors like big banks and insurance companies also invest money in ETFs. It can be a smart strategy whether you’re investing one hundred dollars or one million dollars.
“And of course, you could be generating passive income as dividends are paid out from ETFs just as they are from some companies.”
How Do You Buy an ETF?
“Once you’ve decided which ETF you’d like to buy, use the search bar to find it on an ETF trading platform like Sharesies so you can check out more information on the ETF,” says Roberts.
“Then, simply click ‘Buy’. Just like when you’re purchasing a share in a company, you have the option to either choose how much money you would like to invest in the ETF, or how many shares in this ETF you’d like to buy.”
How Do You Choose Which ETF to Buy?
“Instead of Googling ‘What ETFs should I buy?’, start by thinking, ‘What do I care about?'” says Devine. “Try to understand what your personal values are and what your investment goals are.”
“There are so many great resources to help you learn and gain confidence with making investment decisions. There are podcasts like She’s on the Money and My Millennial Money, there are brilliant books and there are online communities where you can discuss investing with like-minded people.
“Don’t be afraid to jump in before you feel 100% educated on everything investing.”
Adds Roberts: “As Victoria said, there are so many ETFs available so it can be a little overwhelming trying to pick which one is right for you. There’s an ETF for almost everything, so it’s helpful to work out what you actually want first before you start researching individual ETFs.”
“You might like to consider what you’d like your portfolio to look like. Do you want exposure to global markets like the US or NZ? Would you like exposure to other asset types like property or bonds? Would you like your investments to support things you value like female empowerment or sustainability? You can achieve all these things through investing in ETFs.
“On the Sharesies platform, you can search terms like ‘women’, ‘sustainable’, ‘clean energy’ and more to help you find funds that align with your values. For more general research, we have a Learn section on the website to help our users learn and grow on their investment journey. Ultimately, the best way to learn is by doing.”
How Can ETFs Fit Into Your Long-Term Savings Goals?
“Ultimately everyone’s long-term goal should be financial freedom,” says Devine. “That means having enough financial security to live the life you want, instead of living paycheck to paycheck.”
“Passive investments like ETFs are great for supporting this kind of long-term goal because they can create a stable passive income, which is money that you don’t have to work for anymore. They can also deliver strong capital growth when it does come time to sell, and harness the benefits of compounding interest for you.”
Adds Roberts: “Investing for the long-term — whether it’s in ETFs, specific companies, property or any other asset class – is all about the journey to financial freedom. ETFs can be a great asset to hold no matter if you’re a beginner or a seasoned investor.”