Instead of building your portfolio from individual stocks, investing in an ETF allows you to instantly access a wide-range of assets.
One of the most common queries we get from our users is, “I want to invest, but where do I start?”
It’s easy to tell people that investing will help shape their financial future, but most novice investors are unsure of how they should start building their portfolio.
Researching potential investments can take a bit of time, especially if you’re still learning about the different factors that separate great investments from the rest. And even if you’ve already started investing, it can still be difficult to diversify your portfolio with a range of quality companies. A varied collection of stocks from different industries is one of the cornerstones of a sustainable portfolio, but it takes time (and money) to build.
Thankfully, there is a way that you can instantly invest in a diversified basket of stocks straight away.
An ETF (or Exchange Traded Fund) is a mechanism for investing in a range of stocks with a single purchase. They have become very popular in recent years amongst people who want to start investing without putting in the time to research individual stocks, or holding the risk of owning individual stocks.A
An ETF is a managed fund that tries to get broad exposure to a certain sector, market, or style of investing. You can find ETFs that track the overall stock market, or the price of gold, or the cyber security sector. In fact, there seems to be an ETF for everything these days.
When you purchase shares in an ETF, you own a fraction of all the shares that the fund owns.
So now, the big question is – why should I invest in one?
The Benefits of ETFs
Firstly, an ETF is the perfect way for a first-time investor to move from zero to one. It can be intimidating to buy your very first stock, especially when you’re only new to the game. But by investing your money in an ETF, you instantly diversify your portfolio. You gain exposure to all of the underlying assets covered under the umbrella of the fund, which means that even if some of the assets decline, the fund can still go up if other holdings are performing well.
ETFs are a lot cheaper to invest in than other types of funds. Mutual funds managers are constantly buying and selling, trying to rebalance their portfolio to hit certain benchmarks. ETFs generally are far more passive investing vehicles. The average ETF costs 0.53% per year, compared to the average mutual fund at 1.42%.
- Tax Efficiency
The passive nature of an ETF also means that there are fewer capital gains taxes to be paid as stocks included in the ETF aren’t bought and sold as regularly. Capital gains taxes are taxes you pay on profits made from any asset you sell —including stocks. So if you regularly sell off stocks, you’ll pay more tax on any profits you make. To avoid this, most ETFs buy and hold assets long-term, which means they pay little in terms of capital gains, which means there is more money left over for the shareholders.
What ETFs Should I Invest In?
One of the most popular ETFs that we feature in our Showroom is The Vanguard S&P 500 ETF. This index tracks the S&P 500, which means that you are investing in the 500 largest companies that trade on the American exchanges. The top five holdings of this fund are Apple, Alphabet, Microsoft, Exxon Mobil, and Johnson & Johnson. Since its inception in 2010, this fund has had an annual average return of 14.89%, above the long-term historical average of the stock market as a whole.
We also feature the ProShares Dividends Aristocrats ETF, which focuses on the 50 companies within the S&P that have the longest track record of year-over-year dividend growth. This means that you’ll only be invested in companies that have increased dividend payouts every year for the past 25 years at least, which gives you a lot of extra security. There’s a good mix of assets included in this ETF like McDonald’s, PepsiCo, Johnson & Johnson, and Target.
A more recent ETF addition to our Showroom is the Vanguard REIT ETF, which gives users the opportunity to invest in some of the best global property while generating market-beating returns and collecting dividends.
ETFs are a great way for investors of all levels to diversify their portfolio quickly and easily. An investment in an ETF might not offer the massive short-term returns some individual stocks do, but they are a solid bedrock which will support your portfolio through periods of extreme market volatility.
Access some of the world’s most popular ETFs through our Invest app now.