Why consider ETFs?
Report after report proves that professional fund managers are not worth their extraordinary wages. It’s especially true once their fees are taken out of the performance. All-in-all, around 80% of professional investors underperform the market over the long run.
Exchange Traded Funds, or ETFs, have grown rapidly in recent years as more investors are drawn to the simplicity and performance of index funds. For example, an ETF might track a market index like the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) by buying all 200 shares and holding on.
ETFs are simply the ‘wrapper’ around the fund, enabling investors to get in and out of the fund by buying and selling units on the ASX, like any other share. The ease of access has enabled more people to adopt a buy and hold approach at a very low cost.
However, it should be noted that not all ETFs simply track an index, and there are risks to any investment. For example, Australia’s ASX 200 is heavily concentrated to two sectors of the market: financials (aka banks) and resources. That’s not very good diversification.
3 ETFs for sharemarket beginners
If a young person came to me and said they wanted three ideas to buy and hold for the long-term, chances are, these three ETFs would be amongst my best ideas.
Vanguard Australian Shares Index Fund ETF (ASX: VAS)
This fund/ETF simply tracks the ASX 200, buying all 200 shares included in the index. The management fee is 0.14% per year, which is seriously low.
However, as I noted above, the ASX 200 index is very narrow and concentrated, with the likes of Commonwealth Bank of Australia (ASX: CBA) and its big bank brethren making up a large chunk of the fund. That makes it riskier than other ETFs, in my opinion.
For that reason, I think investors should look towards other ETFs, including the…
iShares Global Consumer Staples ETF (ASX: IXI)
This ETF tracks the 1,200 largest global consumer staples companies, like Nestle and Procter & Gamble. The management fee is 0.47% per year, which is not exactly cheap, but the ETF is expected to pay 2% in dividends, offers global diversification and exposure to the US dollar. A cheaper and slightly different alternative might be Vanguard’s International Shares Index Fund ETF (ASX: VGS) — I recently bought the hedged version for my little sister.
iShares Europe ETF (ASX: IEU)
With the extraordinary growth in US markets coinciding with geopolitical woes in Europe, many investors may shudder when they see me recommending a European-focused ETF. However, I think this ETF, which tracks 350 of the largest European companies, offers exposure to an underserved market. While it is a little expensive at 0.6% per year, it would be worthy of a small investment for the long haul.
ETFs are a great way to access a diversified basket of shares with just one investment. But it’s important to note that not all ETFs are created equal and many are not just passive index-trackers like the three listed above. In my opinion, these three ETFs could form a core holding in a young person’s portfolio. However, I would add to that some other ETFs, managed funds and direct shareholdings for a perfect portfolio.
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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.