So you're ready to invest your first $500 into ASX shares? Congratulations! This may be the first step in a 1,000-mile journey, but it is the most important one.
Of course, the act of deciding to invest is just one side of this coin though. The other is choosing which investment is worthy of your first $500.
There are so many options on the ASX to choose from, this part of the journey can be a little overwhelming.
Do you invest in blue chips like Commonwealth Bank of Australia (ASX: CBA) or Telstra Group Ltd (ASX: TLS)? 'Safer' stocks like Woolworths Group Ltd (ASX: WOW) or Coles Group Ltd (ASX: COL)? Go for the 'shoot-the-moon stocks? Or start out with exchange-traded funds (ETFs)?
For a beginner investor, I would recommend the latter.
Want to invest in ASX shares? Try this ETF
Exchange-traded funds are investments that usually represent a basket of underlying shares. They trade under a single ticker code, like other ASX shares, but an investment in one is really an investment in the entire portfolio that an ETF houses.
The most popular ETFs tend to be index funds, which track an index representing hundreds of shares that are listed on a stock exchange.
A popular ASX example is the Vanguard Australian Shares Index ETF (ASX: VAS), which mirrors the S&P/ASX 300 Index (ASX: XKO). The ASX 300 is an index that represents the largest 300 companies listed on the ASX. That's everything from CBA and Woolworths to JB Hi-Fi Ltd (ASX: JBH) and AGL Energy Ltd (ASX: AGL).
Using this kind of ETF gives an investor exposure to a broad range of quality companies while taking the risks of choosing an individual company out of the equation. You get ease of access and instant diversification – traits that I believe make index ETFs perfect for a beginner investor.
An ASX ETF like the Vanguard Australian Shares ETF would be a great place to start for any ASX investor looking to invest their first $500. But I would argue that a superior option is the iShares S&P 500 ETF (ASX: IVV).
Coming to America
This ETF is listed on the ASX. But it doesn't track ASX shares. Instead, it follows an index – the S&P 500 Index – that represents 500 of the largest companies that are listed in the United States.
Why this ETF instead of VAS? Well, ASX shares are great. But they just don't play in the same league as the best companies over in America. Our top ASX shares by size are names like CBA, Telstra Group Ltd (ASX: TLS) and National Australia Bank Ltd (ASX: NAB). All fine businesses, but ones without a lot of global impacts.
However, the top shares in the S&P 500 ETF are names like Apple, Amazon.com, Alphabet (parent company of Google) and Warren Buffett's Berkshire Hathaway. There's also Coca-Cola Company, American Express, Adobe, Netflix and Visa.
These are companies that dominate the entire world with their size, scale, branding and success. – not something we can say for NAB and Coles. And by putting $500 into the iShares S&P 500 ETF, you can get a small slice of all of them and more.
This ETF has managed to give its investors an average return of 17.17% per annum over the past ten years:
While past performance is no guarantee of future success, it's certainly a good sign. The fund also charges a paltry management fee of just 0.04% per annum too (or $4 a year for every $10,000 invested).
So considering all of the options on our share market, I think this ETF is a perfect choice for beginners if they want to invest in ASX shares.
