Picking individual stocks can be hard. Great companies can be difficult to find without some help, such as that from The Motley Fool Share Advisor, and so many investors often opt to put their money into managed funds operated by financial planning firms. These funds often charge a disproportionate amount of money for the actual stock picking nous that gets applied, which can severely hamper results over the long term.
Incidentally, these funds are usually measured against one of the main Australian share indexes, either the ASX 200 or the All Ordinaries. As my fellow Fool Bruce Jackson wrote a bit over a year ago, these fund managers often UNDERPERFORM the main Australian indexes, and THEN charge some significant fees on top.
But don't fret; there is a simple alternative. Investors can do better than many managed funds, and diversify their portfolio by owning 100, 200 or 3,000 stocks, and receive regular dividends by purchasing units of a huge number of low-fee funds. These funds will deliver index-tracking, and big-fund-beating returns forever.
For example, investors looking to invest in the top 20 Australian shares can purchase the exchange-traded fund (ETF) called the iShares S&P/ASX 20 ETF (ASX: ILC). This ETF can be purchased through any Australian broker, such as Comsec, E-Trade or similar, and contains, among others, the big four banks Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), and Commonwealth Bank of Australia (ASX: CBA), as well as the major miners Rio Tinto Limited (ASX: RIO), BHP Billion Limited (ASX: BHP), Woodside Petroleum Limited (ASX: WPL), and income-favourite Telstra Corporation Ltd (ASX: TLS). The ETF pays a quarterly dividend, which last year added up to a yield of 4.1% at around 90% franking, or roughly 5.5% grossed up.
Another alternative is the SPDR 200 Fund (ASX: STW), which tracks the S&P/ASX 200, or for more adventurous investors, there are the iShares Asia 50 ETF (ASX: IAA) or iShares Europe ETF (ASX: IEU), which track Asian and European stocks respectively. Importantly, buying into the funds costs the same as a normal trade, and the funds take an annual fee of around 3 cents per $100 invested to keep the fund tracking the index.
Foolish takeaway
While purchasing Motley Fool Share Advisor stocks should be an important part of your investing philosophy, investing in ETFs can provide investors with instant diversification or exposure to international markets.
