Exchange Traded Funds, bigger than super and mutuals?
Exchange Traded Funds (ETFs) are becoming a real threat to the big super and mutual funds. They’re easy to manage yourself, useful for SMSF operators, and their returns are pretty good, given the state of the global markets and the soggy, slow moving cash and bond rates. The most important thing about the ETFs is that they provide direct access to the highly mobile indices that the funds use themselves.
ETFs and indices- Portfolio structures
Another thing investors need to consider when setting up working portfolios which indices to target. Getting the structure right, and creating exposure to indices used to be very hard work indeed, even for professional fund managers. With ETFs, it’s very easy. The ETFs are designed to work on specific indices.
One of the reasons ETFs are so investor- friendly is that they take the arduous decision making out of the stock selections. Buying in to an ETF means buying in to the pick of that index. Indices are much easier to target than trying to buy a range of stocks, all with different returns on investment and those adorable deferred dividends, etc which drive most investors up the wall at some point.
Getting started with ETFs.
That means you can set up your portfolio to cover a range of indices. If you’re new to the ETF market, it’s a good idea to keep things simple. The ETF market includes some quite complex products. You need to learn this market step by step, so your judgment and investment instincts are kept well informed at all times. A typical starter ETF portfolio will include things like blue chips, always useful for getting returns from this often pricey, as well as jumpy, index.
Note: The blue chips are also a good way of seeing how ETF performance, market performance and stock performance interact. These are valuable lessons in themselves, and you’ll also be able to put dollar figures on your choices and your investment options.
Unlike mutuals and super, there’s also direct access to real time market values for ETFs. The simple fact of being able to sell ETFs in the market is a working valuation of your holdings when you need one. That’s particularly useful when you need verifiable asset values in a hurry.
Riding the indices
Using indices as investment vehicles compared to individual stocks is effectively providing yourself with multiple income streams, rather than the snail- like effect of investing in a stock and hoping it goes up, not down. The critical risk factor of putting all your eggs in one shaky corporate basket during earthquake season on the markets is also avoided.
If you’re doing DIY superannuation, your natural need is for something a bit more trustworthy than a CEO’s glowing review of his own performance as the basis for investment. ETFs are a type of natural insurance against the very debatable merits of reliance on “market sentiment”, “pundits” and the rest of the equity sales pitch culture. Indices aren’t sentimental. They can be analyzed, but not particularly influenced by rhetoric and other non- cashable commodities.
The ETF ride on the indices is a lot less bumpy than the ride on the markets themselves.
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