What if I told you, you could get away with making less than five investments in your life but could still live a very comfortable retirement?
You could also sleep easy at night, knowing it isn’t a trick.
And with this strategy, you won’t need to own a portfolio of 10, 20 or even 50 stocks that you must monitor week-in-week-out.
In fact, you could make just three investments using this strategy and get exposure to hundreds of the world’s best companies, including Telstra Corporation Ltd (ASX: TLS), Commonwealth Bank of Australia (ASX: CBA), Google, Apple and Facebook.
The answer lies in Exchange Traded Funds or ETFs. They are a form of managed investment.
An ETF is a pool of money that simply tracks a basket of investments and rolls them into one that product investors — like you and me — can buy and sell on the market.
For example, all 200 companies in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) could be found in one investment, listed on the ASX. If you invested $100,000 in this hypothetical ETF what you’re getting is exposure to every company in the ASX200, with the exact exposure to each varying by the size of its weighting in the index.
- Global Growth
Apple – the world’s largest company – makes up slightly more than 3% of the value in the USA’s S&P 500 market index. Unsurprisingly, BlackRock’s iShares Core S&P 500 ETF, found on Google Finance under ISCS&P500 CDI 1:1 (ASX: IVV), has 3.62% of its owners’ money in Apple shares. As of Thursday, total net assets invested in the ETF stood at a staggering $95 billion.
It costs just 0.07% per year for BlackRock to manage your money in this particular ETF. However, some companies within the S&P 500 index are expected to pay dividends, so the expected yield on the ETF is 1.83%. Over the past 10 years, the ETF has achieved an average annual total return of 7.64%. However, it has returned 20.77% over the past five years!
Interestingly, 20.4% of all funds in the S&P 500 ETF are invested in information technology with a further 16.23% going towards the financial sector.
- Local income
You can also get ETFs that focus specifically on dividend-yielding companies. The iShares S&P/ASX Dividend Opportunities ETF, known on Google Finance as iShares S&P/ASX High Dividend Index Fund (ASX: IHD), is a pool of money that tracks the S&P/ASX Dividend Opportunities Index (ASX: XDI).
Started in December 2010, this dividend ETF has returned 3.79% per year – not a great return by any means. However, based on the last four quarterly distributions to holders, the ETF yields a dividend of 6.5%. Although nothing is guaranteed, it’s a very respectable dividend yield on a diversified portfolio that incurs a management fee of just 0.3%.
Finally, the iShares Global Consumer Staples ETF, or ISGLCOSTP CDI 1:1 (ASX: IXI) on Google Finance, tracks the S&P Global 1200 Consumer Staples Sector Index. This index includes top global brands such as Nestle, Proctor & Gamble, Coca-Cola and more.
The ETF has just 1.9% exposure to Australian companies and 6.2% of the fund is made up of Japanese firms, meaning a large proportion of the dollars invested are exposed to European and American companies. It has an estimated yield of 1.83%.
The ETF costs 0.47% to manage – slightly above the ASX-listed average of 0.46% – and has returned 9.56% per year since inception nine years ago. Thanks to a falling dollar, the return jumps to 28% per year over three years.
Over the years, I’ve written more than 2,100 financial articles for The Motley Fool and throughout this time, I’ve come to the conclusion that of the 33% of the Australians who invest in shares directly, 90% probably shouldn’t. Too many people go into shares with the wrong attitude, expectations and strategy.
A great many of these investors will lose money and never to return to the share market, despite its obvious long-term benefits.
Therefore, I’m of the opinion that unless you intend to approach your investing with the right temperament, passion and willingness to learn, you should strongly consider buying an ETF or low-cost index fund.
Heck, even if you do have all those positive characteristics you can always complement your direct share ownership with a handful of ETFs!
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Motley Fool contributor Owen Raskiewicz has a financial interest in the iShares Global Consumer Staples ETF.
Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of iShares Global Consumer Staples ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.