Investing In ETFs – What You Should Know
03 November 2017
Investing does not have to be a scary endeavor. In fact, it can be interesting and help you gain control of your financial future. We caught up with Ridwaan Moolla, Head of Digital Enablement at Absa Wealth, Investment Management & Insurance, to get the lowdown on one of the best investment products around. Let’s talk ETFs.
What is an ETF?
Exchange Traded Fund
Simply speaking, Exchange Traded Funds (ETFs) are financial products that are bought and sold on the stock exchange like normal shares. Unlike with shares, you don’t own the assets, but have all the benefits of exposure. Plus, you aren’t exposed to just one company, but a portfolio of different companies.
Why choose an ETF?
When you buy an Exchange Traded Fund you have the following benefits:
- Diversification: Exposure to the whole market or a set of asset classes.
- Liquidity: Market Makers provide full liquidity which enables you as the investor to easily buy or sell the ETF.
- Transparency: The ETFs’ constituent assets, holdings and investment methodology are published regularly – making it easier to keep track of what’s happening with your investment.
- Lower costs: Due to ETFs being passive in nature, they tend to have a more cost effective fee structure than actively managed funds.
- Investor protection: ETF securities are fully backed by the underlying assets, so you’ll never lose out when a Market Maker doesn’t make it.
- Traded like a share: ETFs are funds listed and traded like ordinary shares on a stock exchange – quick and easy.
How do ETFs work?
Exchange Traded Funds are heavily regulated. This makes them very secure, as the ETF Market Maker has to hedge every investment you make and has to buy and sell them at a fair price.
What are the costs involved?
The cost of each Exchange Traded Fund is built into a percentage based management fee. When you compare ETFs that are similar, have a look at the stipulated TER (Total Expense Ratio), a measure of the total costs associated with managing and operating the fund, often the biggest differentiating factor between offerings.
What are the returns on a ETF compared to other investment options?
When you decide to get into Exchange Traded Funds, know that you are looking at the long term. Historically, ETFs are a good way to beat inflation with your investment. Over 20 years, this investment should yield in excess of 15%.
How do I buy an ETF?
You can go about buying your Exchange Traded Funds in two ways. Go directly to the Market Maker or get it through a broker. The drawback from going directly to a Market Maker, is that you can only get their product offerings, whereas with a broker you can get the best value across a mix of ETFs. For easy service with plenty of educational resources, sign up at: AbsaStockBrokers.co.za.
Pro Tip: Get your first ETFs as part of your Tax-Free Savings Account – up to R30 000 per year.
To take your financial knowledge to the next level, Moolla suggests setting aside an hour or two and using that time to work your way through the Educational Centre at AbsaStockBrokers.co.za. You’ll be equipped to take on the markets with confidence!
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.