I think one of the best reasons why shares are such a great investment is exchange-traded funds (ETFs).
I have already written that returns and dividends are two of the best reasons to invest in shares.
Exchange-traded funds (ETFs) could be the best reason why shares are such good investments, aside from compound interest.
With shares it's great that we can easily diversify our investments. If you buy a property you have a single asset, based in one street of a city and (probably) relying on a single tenant to pay the rent. If you just buy one share on the ASX that business is probably generating earnings from one or several countries, which I think is much better.
With that single property, you have hundreds of thousands of dollars allocated to one asset. It's easy with shares to diversify your investments across many businesses with much lower investment cost (as low as $500 per trade). But ETFs have made it even easier to diversify.
An ETF allows you to buy an index of shares with a single investment.
For example, BetaShares Australia 200 ETF (ASX: A200) tracks the ASX 200 – an index of 200 of the biggest businesses listed on the ASX. Your money is spread across 200 businesses in a single investment. You buy it just like a normal share through your share broker. Of course, the biggest businesses are allocated the most within the index.
If you invested $1,000 in this particular ETF, $78 would be allocated to Commonwealth Bank of Australia (ASX: CBA), $71 to CSL Limited (ASX: CSL), $62 to BHP Group Ltd (ASX: BHP), $48 to Westpac Banking Corp (ASX: WBC), $41 to National Australia Bank Ltd (ASX: NAB), $39 to Australia and New Zealand Banking Group (ASX: ANZ), $27 to Woolworths Group Ltd (ASX: WOW) and so on.
The performance and dividends of the underlying businesses will decide how the ETF does and the income that passes through to the ETF's investors. Over the long-term shares have done very well for investors.
It can be really hard knowing when to buy and when to sell individual shares. ETFs can take out a lot of the guesswork, you just need to decide which ETF(s) to start with. Just setting up a regular investment plan of once a month, or every two or three months, will mean your money grows at the market average.
For ASX shares, BetaShares Australia 200 ETF is probably the best ETF option because of its ultra-low management fee cost of 0.07% per year.
That doesn't mean you need to pay 0.07% out of your bank account, the ETF provider takes it from the investment balance so you don't notice. 0.07% is extremely low in the ETF world, many regular people underperform the market average because they pay expensive fees to fund managers that aren't worth it. Just achieving the market average is a very good result over the long-term.
But, only 2% of the world's share market is based on the ASX, so I think it makes sense to invest in overseas share ETFs. iShares S&P 500 ETF (ASX: IVV) is a great option. It's invested in 500 US-listed shares. But don't think of them as American, they are actually global businesses like Microsoft, Amazon, Apple, Facebook, Alphabet (Google), Berkshire Hathaway, Visa, MasterCard, Oracle, McDonalds and so on.
There are other popular ETFs like Vanguard MSCI Index International Shares ETF (ASX: VGS) which invests in large businesses across the world including the US giants mentioned above and non-US ones such as Toyota, Samsung, Nestle, LVMH, Unilever and so on.
Foolish takeaway
ETFs are a great way to invest if you want a very passive approach without thinking about when to buy. You could have a portfolio of just a handful of different ETF choices which would give your portfolio excellent diversification. You just have to hold your nerve when the share market drops – that's the best time to be buying shares!
