How to invest in ETFs
Via an online broker
Online brokers are increasingly popular as a simple, DIY platform to manage exchange traded investments such as Active ETFs, Passive ETFs and shares. Popular online brokers include:
- Pearler
- Commsec
- NAB Trade
- CMC Markets
- Bell Direct
Already have an account? Great! Simply search the code of the Active ETF you wish to invest in e.g. EIGA, IMPQ, ECAS, ECOR or EMAX. and follow the prompts. The process is the same as investing in a single BHP or Westpac share.
Don’t have an account? Simply follow the sign-up procedures and once your account is active you can follow the steps above. Remember, you can use the one online broker account to make many investments in one place.
Via a traditional broker
Traditional brokers offer a more tailored service to their clients.
Examples of brokers include:
To execute and order through a traditional broker, call you broker and quote the code of the Active ETF you wish to invest in e.g. EIGA, IMPQ, ECAS, ECOR or EMAX.
Via your financial adviser
Your financial adviser can probably help you invest into an Active ETF. Call or email them and quote the code (e.g. EIGA, IMPQ, ECAS, ECOR or EMAX.) and the amount you wish to invest. It’s that simple!
If you like we can send then an information pack designed for advisers so they can learn about the Active ETF.
Follow the prompts here for an automated email to be sent to them with all the details.
How to invest in ETFs
Exchange Traded Funds (ETFs) are parcels of securities such as bonds and shares which are traded as a single unit, in much the same way as you can buy and sell shares. Unlike individual shares, ETFs are designed to reflect the performance of a specific index or market sector rather than the performance of a single security.
ETFs are made up of a wide range of underlying assets, compiled by ETF providers and fund managers, and you can buy them on exchanges such as the ASX in the same way as you would buy shares. One of the key benefits of ETFs is that it provides investors with easy access to a wider range of assets than buying individual stocks and shares.
ETFs vs mutual funds
Mutual funds, often used as an alternative to savings accounts, are another investment option which works on a similar principle to ETFs, pooling investors’ money into a range of assets. What sets ETFs apart are their iNAV, or indicative Net Asset Value. The iNav refers to the total estimated value of the assets held in a portfolio.
Unlike mutual funds, whose value is calculated only at the end of the day (limiting opportunities to buy and sell as a result), ETFs provide a regularly updated iNAV to give investors an accurate idea of a fair price for an ETF unit. This allows investors to trade ETFs much more freely, making them a much more liquid investment than mutual funds. In turn, this gives investors more freedom in their trading strategies.
How to buy ETFs
Just like stocks, ETFs are bought and sold on the stock market, meaning you’ll need to open a brokerage account to begin investing in them. Online brokers are often the best option for new traders, so you should compare online share trading platforms as a first step to find one that’s right for you.
Open a trading account
Check each one’s brokerage fees, whether they impose inactivity fees, minimum deposit amounts and what markets they have access to. If you’re new to investing, choosing an easy-to-use trading platform with educational features and financial advice can also be a good option.
Some things to consider when choosing an ETF
After you’ve opened a trading account, it’s time to choose your ETFs. There are different types of ETFs, as explained below, but no matter the variety of ETFs you should assess two important factors: the expense ratio and whether they pay dividends. The expense ratio is essentially the fixed rate you pay the issuer for the ETF’s management, normally shown as a percentage; for example, a 1% rate on an investment of $800 would mean paying $8 per year.
Dividends may or may not be paid depending on the underlying assets and the terms of the fund. Should your ETF pay dividends, check whether they are paid directly to your bank account or if they are automatically reinvested as part of a dividend reinvestment plan (DRP). Information on both the expense ratio and dividends should be available in the ETF’s product disclosure statement.
What are the different types of ETFs?
While the general premise behind how ETFs work is fairly simple, there are different varieties to consider, meaning you have to consider your options carefully before buying ETFs. The main difference to understand is between passive and active ETFs.
Passive ETFs
Passive ETFs (also known as index funds) are intended to track an index highly accurately, working on the principle that the market will generally rise over time even if individual securities within it fall. This makes a passive/index a relatively hands-off investment for the long term which will hopefully gradually build up a solid return.
Active ETFs
Active ETFs (also known as Exchange Traded Managed Funds, or ETMFs) aim to outperform the market they’re based on. The Active ETF’s fund manager will do this by focusing more heavily on high-performing securities within the index and, as the name suggests, being more active in trading assets to rebalance the Active ETF.
Other ETF options
Beyond active and passive ETFs there are also many other variations such as commodity, currency, debt, fixed income or bond, and sector ETFs.
- Commodity ETFs: Involve a fund investing in commodities rather than market indices, either by buying the commodities themselves or tracking their future performance.
- Currency ETFs: Invest in foreign currencies as a low-risk means of gaining exposure to the foreign exchange market.
- Fixed income or bond ETFs: Invest in bond assets or other financial products which generate a fixed income through interest payments.
Sector ETFs: Track market sectors instead of indexes — for example, a technology ETF would track a set of companies in the tech sector, and insurance ETFs might track car insurers or life insurance providers.
What are the main benefits of investing in an ETF?
There are several benefits for investing in an ETF. These include adding diversity to your portfolio, low risk and costs, the liquidity of the asset and passive income.
- Portfolio diversity: ETFs allow you to quickly and easily diversify your portfolio; rather than having to carefully research numerous stocks and buy them all individually to build a diverse investment portfolio. ETFs allow you to buy multiple securities at once with minimal effort. Depending on what is included in the ETF, they may also provide you investors with access to different asset classes within a single investment.
- Lower risk: ETFs follow the movements of the market and generally rise over time. They’re much less of a risk than individual shares which are more prone to volatility and sudden falls. The upward trend of the markets provides a long term investment with minimal, carefully managed risk, giving a better guarantee of a favourable return than other investment options.
- Lower costs: ETF investments can be cheaper than buying into several individual shares to achieve the same level of diversity. If your broker allows fractional trading, then the minimum initial investment may be even lower.
- Liquidity: Since you can buy or sell ETFs in the same way as shares, they can be sold with relative ease. Selling an ETF quickly can be useful if for any reason you need a quick cash injection, such as for an emergency or a sudden opportunity with a limited window for action.
- Passive income: An ETF may pay dividends. This is subject to the structure of the exchange-traded fund. This makes it an ideal investment for dollar-cost averaging (DCA) investors that continuously invest every month into an asset and reinvest the yield for compound growth.
What are the main risks involved with investing in an ETF?
With any investment, there will always be a risk to reward ratio for all of your investments. Here are some important things to consider when investing in an ETF.
- Not entirely risk free: While some ETFs are lower risk in comparison to some other investments, things can still go wrong. There may be tracking errors — where the ETF is improperly balanced and inaccurately tracks a market’s upward trend. Or, the market as a whole can underperform, leading to a loss of value in an ETF’s underlying assets.
- Lower returns: The tradeoff for a lower risk is that index-tracking ETFs also provide less than market returns. This is why actively managed funds can be more attractive than passive ones, as they aim to outperform the market rather than match it.
- Taxes and fees: As they’re traded like normal shares, ETFs are subject to capital gains tax. International taxes can also apply if you buy ETFs based on foreign markets like the Dow Jones or NYSE instead of Australian shares and markets. On top of taxes, the exposure rate and other management fees can begin to eat into your returns. This is why it’s crucial to read the product disclosure statement (PDS), do your own research and check all of the finer points, for example dividends vs franked dividends.
- Currency risk: If you invest in a foreign ETF using currency other than the Australian dollar, your investment could be subject to currency fluctuations.
- Liquidity risk: Some ETFs are more highly traded and liquid than others. If you invest in an ETF based on less liquid assets, such as those in emerging markets, you may not be able to make an ETF trade as easily or for as favourable a price as you would like to.
Final thoughts
As with every investment, exchange-traded funds do carry risk and it’s important for every investor to do their own research, conduct due diligence, investigate the product disclosure statement and be aware of the pros and cons from a taxation standpoint.
That said, ETFs can be a great way to diversify your portfolio and gain access to a wide array of asset classes, especially for investors that are looking to build wealth, minimise risk and capitalise on the benefits that investors can gain from an ETF.