So, you want to invest in an ETF. Here’s how to get started
So, you have a little bit of money and you’re getting tired of ultra-low savings rates, or maybe you’re ready to dip your toes into the share market.
Investing for the first time can be scary, but it doesn’t need to be hard if you know what you’re doing. ETFs, or exchange-traded funds, have become popular for that reason: the investment vehicles are considered one of the easier ways to begin investing.
And investors know it: ETFs have seen inflows of $15.4 billion in the year to the end of October – only $100 million less than the 2019 record.
Curious? Yahoo Finance spoke to BetaShares’ senior marketing manager Ele de Vere to find out more.
What exactly is an ETF?
ETFs are a type of investment fund that are traded on stock exchanges. Essentially, an ETF is a collection of stocks that tracks an index or a theme – for example, renewable energy or tech.
ETFs can contain stocks, bonds, commodities and other assets.
How much money do I need to start investing through ETFs?
One of the biggest benefits of ETFs is their price, de Vere said.
“The good thing with ETFs compared to traditional actively managed funds where you’d have a significant minimum of around $10,000 is that ETFs don’t have any minimum requirements,” she said.
“So the minimums to be aware of are mainly implied by an online broker. So if you use CommSec or NABTrade, they all have minimum investment amounts.”
That’s usually around $500, but Australians who are unable to stump up that initial investment amount can also try app-based platforms like CommSec pocket, which allows investors access to certain ETFs for $50.
“It’s really removed those massive cost barriers that used to be associated with being able to invest in a managed fund, essentially.”
How do I access an ETF?
There are several ways to access an ETF, but the most common way is to go through an online brokerage account, like CommSec.
“Once you set up your online brokerage account – and you do need to go through a bit of a process… identification checks and security measures – you get access to the ASX which gives you the ability to buy and sell ETFs.”
Once that’s set up, you log in to your account and find the ETF code or ticker and type it in.
There are several groups in Australia that issue ETFs including BetaShares, Vanguards and ETF Securities.
Then, you place your order.
“You might say you want to buy $2,000 worth of the ETF, or you might want to buy a certain number of units and then you place your order,” she said.
“If you place it at the correct price, you become the owner of an ETF.”
Wait – what’s the ‘correct price’?
When you go to buy or sell an ETF, you will be asked for your limit price. This is essentially the purchase trigger. It tells the market that once the unit price hits a certain value, you want to buy it.
How do I know which ETF is right for me?
According to De Vere, the first question those considering investing need to ask is: “Can I afford that? And do I have any debts I need to pay off?”
It’s important to know how to prioritise your spending, she said. Then, if you see an ETF you like the look of, the next question is whether you understand what you’re investing in.
“Really take the time to read articles, go to providers’ websites, and look at the educational material that they've got on offer.”
It’s also important to understand the risks involved with the investments you’re going to make to ensure that you’re comfortable with your decision.
“Take the time to understand what you’re investing in.”
How do I know what my risk tolerance is?
It can be tricky to know how much risk you’re willing to take on until you actually access the market, but de Vere said there’s one place novice investors can start, and that’s their investment timeline.
“One really great thing to understand, first and foremost as a way to look at risk is what your investment horizon is. If you’re going to invest in something that has a high risk such as shares, versus cash, that’s going to go up and down a lot more than your money in a bank,” she said.
“You need to be prepared to see that go up when the market rises and also go down and not freak out and sell out. So one of the first approaches to assessing risk is asking, ‘How long do I want to be invested in this ETF for?’”
ETFs have democratised investing
De Vere said one of the major benefits of ETFs is how they’ve made investing significantly more accessible.
“There isn’t that cost barrier to access and set up an investment portfolio which I think is so exciting, and in a way it’s democratising investing – you don’t need to be some bigwig, high-flyer guy with thousands of dollars in the bank,” she said.
“You can really get started in investing at a much lower cost than has ever been possible, which is just so exciting for people.”
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