5 ETF Concepts You Must Understand

If you’re new to investing in ETF’s it can be tricky figuring out where to start.  The good news is that they are both easy to understand and simple to implement in your overall financial strategy.  Please bear in mind that further reading is highly encouraged, as information needs time and repetition to be fully absorbed.

 

Without further ado, here are the 5 ETF concepts you must understand:

 

  1. Low fees should always be the main factor in selecting an ETF, closely followed by the reputation of the ETF provider, whether they have a Dividend Reinvestment Program, and finally whether there are any tax benefits such as franking credits;
  2. Think of the fee you pay the ETF provider (for owning a unit of the ETF) as your admission charge to getting into the Diversification Club, of which you should remain a member well into your golden years;
  3. Understand that there is a very high price correlation across most ETF’s, even between domestic and international, so there are no “extra benefits” to owning more than 4 to 6 different ETF’s. This is the embodiment of the KISS principle;
  4. When investing in ETF’s you will only ever “beat the market” if you have incredible luck and manage to accumulate more units at or near the troughs, for any given period of time. Otherwise your average return is likely to be several percentage points lower than the index;
  5. If your portfolio is solely comprised of ETF’s and no individual stocks it means you have finally realised that you have better things to do than calculating the intrinsic value of companies, trading, or market timing. Well done to you – you’re enjoying the best benefit of being an ETF owner: your time!

 

Now that you have understood these concepts, here is a thorough list of ETF’s you can invest in, all of which are listed on the ASX.  Please note that being listed on the ASX does not necessarily mean that the ETF fund is domiciled in Australia.  Here is a great article explaining this concept and its potential implications for investors.  Another great, practical website I discovered in doing this research was that of the ETF Bloke.  My attitude to and acceptance of ETF (i.e. index) investing was greatly influenced by the following book: the Simple Path to Wealth and the fantastic articles on the author’s website.

 

I hope my explanation of ETF’s and links to additional resources has helped you get a better bearing on them and most importantly the confidence to start investing in them.  If you still have any nagging doubts or concerns, please leave a comment below.

As Always,

Invest Sagely