An exchange-traded fund (ETF) is an investment fund traded on a stock exchange. An ETF can hold assets such as stocks, commodities, or bonds. ETFs have become increasingly popular over time, and with this increased popularity, the number and diversity of ETFs has also boomed. Nowadays you can buy ASX ETFs that target specific countries, investment trends, indexes, or pretty much whatever niche you can think of.
Benefits to investing in ASX ETFs
Here are 3 benefits to investing in ASX ETFs:
1. No minimums
One benefit that ETFs have over traditional index investing is the fact that they are openly traded on a stock exchange like the ASX. This means that there is no minimum investment required to invest in an ETF, other than the unit price. Much more accessible for retail investors like you and me.
Buying ETFs will give you instant diversification. By their very nature, an investment in 1 ETF means you are holding multiple companies. ETFs can also make it easy to gain international diversification. Some great examples of this are the Vanguard U.S. Total Market Shares Index ETF (ASX: VTS) and BetaShares Asia Technology Tigers ETF (ASX: ASIA).
3. Thematic investing
ETFs are great for thematic investing. You may love a long-term trend, but not know which company to back or simply don’t have enough capital to invest in all of the potential winners. ETFs can allow you to invest in trends like the war on cash, cannabis legalisation, or augmented reality.
Do your research
I’ve outlined several benefits associated with ETFs, however, as always, it is important to do your research. Although 2 ETFs may be broadly investing in the same thing, it is important to check the underlying holdings line up with what you would expect. This list can generally be found on the website of the ETF provider, such as BetaShares or Vanguard.
Another thing that you should review is the expense ratio of your chosen ETF. Although ETFs are generally much cheaper than traditional investment funds, costs still kill investment returns. It is important to ensure that the fees you are paying are as low as possible or relative to the outsized performance of the ETF. Vanguard has some of the lowest expense ratios on the market, as highlighted by the 0.1% per annum expense ratio for the Vanguard Australian Shares Index ETF (ASX: VAS).
The foundations of your portfolio
ETFs are great for building the foundations of your portfolio and getting diversification when you are starting out investing. In my opinion they are an excellent tool, especially if you want simple stock market exposure.
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Motley Fool contributor Lloyd Prout has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended BetaShares Asia Technology Tigers 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.