Exchange traded funds (ETFs) are one of the best things that the finance industry has invented in recent times.
An ETF is simply a fund that you can buy through a stock exchange, as opposed to going directly to a fund manager and buying units – which is how it was commonly done before.
I think most people would agree it’s much easier managing your shares when they’re all bought and sold on the ASX through a broker.
But, the benefits of ETFs are much stronger than just that.
Most ETFs give investors very quick and easy diversification. Previously, if you wanted diversification you would have to buy all the different companies yourself, which would cost a lot in brokerage. Now you can just buy one ETF and get exposure to all 200 of the ASX200 shares in one purchase.
Another big benefit to ETFs is that there are some with very low management fees. Some are as low as 0.04% per annum. In comparison, most active fund managers will charge at least 1%. Fund managers have to perform well to justify their fees now!
There are a huge range of ETFs out there. Some focus on typical stock indexes, some focus on sectors and some focus on different countries or regions.
So, what ETFs can you buy? The Vanguard Australian Share ETF (ASX: VAS) gives you exposure to the Australian share market. The Vanguard MSCI Index International Shares ETF (ASX: VGS) gives you exposure to the global share market. BETANASDAQ ETF UNITS (ASX: NDQ) gives exposure to the biggest tech companies in America and the iShares S&P 500 ETF (ASX: IVV) gets you exposure to 500 of the biggest and best companies listed in the USA.
Ultimately, I think ETFs are a fantastic way for most “I don’t care about shares” investors to get involved in shares. ETFs are very passive, yet investors of ETFs are likely to beat a lot of professional investors due to the fees. At the moment I’d for the NASDAQ ETF because of how much growth Facebook and Alphabet (Google) are likely to generate over the next decade.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended BETANASDAQ ETF UNITS. The Motley Fool Australia has recommended Vanguard MSCI Index International Shares 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 Scott Phillips.