Investing on your own in shares can be daunting. To separate the wheat from the chaff, you need to understand a company's financials, ascertain its management quality, and determine its future growth potential. No wonder that many people place the share market in the "too hard" basket, and content themselves with receiving the sub-3% returns on offer from term deposits.
Happily, you can beat the measly returns on offer from term deposits without the hassles of individual share picking, by investing through Exchange-Traded Funds (ETFs).
Depending on which type you choose, ETFs can hold shares, bonds, commodities, derivatives, etc. ETFs divide the ownership of those underlying assets into shares, which you can buy and sell on a stock exchange. ETFs come in all shapes and stripes, with some holding a combination of different asset classes, but we'll focus on ETFs that hold a basket of shares.
A variety of ETFs trade on the ASX. For instance, the Vanguard Australian Shares Index ETF (ASX: VAS) invests you in close to 300 of the ASX's largest Australian companies and property trusts, allowing you to achieve returns on par with its underlying index, the S&P/ASX 300 (Index: ^XKO) (ASX: XKO). This ETF has returned about 6.7% p.a. over the past 5 years.
With ETFs, you can easily invest in some of the world's biggest and most well-known businesses right here in Australia, without opening a foreign brokerage account. The iShares Global 100 ETF (ASX: IOO), for example, holds shares in the 100 largest multinational companies. This ETF gives you exposure to some of the world's most iconic companies, including Apple, Nestle, Alphabet (formerly called Google), Procter and Gamble, Coca-Cola, and L'Oreal. The iShares Global 100 ETF has returned about 14.5% p.a. in the past 5 years.
Foolish takeaway
ETFs can remove some of the challenges associated with picking individual shares for a portfolio. They help you achieve instant diversification, both across sectors and geographies. Unlike mutual funds, they don't require initial minimum investment capital, nor oblige you to commit to an investment schedule. In addition, many ETFs have low fees compared to mutual funds. Last but certainly not the least, a portfolio crafted using just two or three ETFs can, over the long term, handily beat the returns on offer from term deposits.
ETFs can form the core of your portfolio. If this primer has piqued your interest, consider watching the video tutorials available on ASX's website.
