Investing your money is all about trying to grow your wealth over a while. ETFs are one way to do this over the long term and they can provide benefits like diversification, exposure to a range of companies in one investment and generally lower costs. Like all financial investments, ETFs come with a level of risk. We outline some benefits and risks for you to think about.
Some benefits of investing in an ETF:
- Diversification: Investing in just one ETF can help you diversify (spread your investment and spread your risk) across a group of companies, industries, or countries.
- Simpler choice: ETFs invest in companies with a particular theme, like sustainability leaders or emerging markets. This makes it easier to choose an investment because you don’t have to contemplate which specific companies to buy.
- Instant portfolio: ETFs can be a quick way to get exposure to a whole portfolio of companies, without the cost of having to buy and manage individual stocks.
- Ease of trading: ETFs can be bought or sold just like normal shares on the Australian sharemarket, meaning you can invest or sell whenever the market is open.
- Generally, lower cost: ETFs charge a management fee but it’s usually lower than the kind of fee charged by an actively managed fund.
Some risks of investing in an ETF:
- Prices can rise and fall: like any investment, the price of ETFs can go up or down, which will affect your return on investment.
- Currency risk: if you buy an ETF that invests in overseas companies or assets, a change in the Australian dollar might impact the value of your investment.
- Issuer risk: When you invest in shares, your money is exposed to the risk of the company losing value or becoming insolvent. When you invest in an ETF, an ETF issuer invests in multiple companies on your behalf, which reduces the impact of a single company performing badly. If the ETF issuer becomes insolvent and the fund closes down, the fund’s underlying assets may be sold and money from the sale would be returned to investors who held this ETF.
- ETF-specific risks: Some ETFs will have their specific risks, so read the Product Disclosure Statement (PDS) for more info before you invest.
Any financial investment involves tax, and investing in ETFs is no different. Before you invest, make sure you understand the potential tax consequences. We can provide some general tax info, but you should talk to a tax adviser or accountant if you have any questions specific to your circumstances.
Do your research
Knowledge is power, especially when it comes to investing. So make sure you research the risks associated with ETFs, and ask yourself if you are comfortable with them before you invest.
And don’t forget, the past performance of any investment isn’t necessarily an indication of its future performance. Investing is a long-term commitment, and sitting out the short-term fluctuations is just part of the process.