ETF's or Exchange Traded Funds have several advantages over direct investment and managed funds, some common advantages include:
- Effective - Instant Portfolio
- Safe - Diversification
- Flexibility - Easy To Change
- Cost Effective - Low Management Fees
- Performance
Effective - Instant Portfolio
Investing in the stock market and deciding what stocks to invest into can be a complicated, frustrating and expensive process (if you get it wrong). Exchange Traded Funds solve this dilemma by providing you with diversified market exposure in one simple trade.
For example, when investing in the ASX 200 Tracking ETF, in one trade you own a portfolio made up of the top 200 companies listed on the Australian Stock Market.
Safe - Diversification
A typical investors holds a portfolio of 3-7 stocks. If one of these companies were to go bankrupt it would, in reasonable circumstances, significantly damage your entire portfolio. However, what if you invested across 200 stocks? Now if one company went into liquidation you may not even notice it.
The revelation here is you can save on costs by investing into one asset (instead of 3 - 7) and in the process reduce risk. In addition, the fund manager will ensure that your portfolio replicates the underlying index.
Flexibility - Easy To Change
If you wish, you could change your investment focus from say the Australian market to the European or Chinese stock market, within seconds.
Currently on the ASX there are exchange traded funds providing investors with access to global stock and commodity markets, all of which can be traded through the Australian Stock Exchange.
Cost Effective - Low Management Fees
Typically the management fees on Exchange Traded Funds are drastically lower then other managed investment schemes. Management fees on ETFs are often around 0.09% to 0.7%pa - compared to managed funds which can charge 1 - 3%pa, this is a huge saving!
Performance
Research has shown that ETFs consistently outperform actively managed funds. A large number (almost half) of managed funds, due to high costs or simply poor management, do not beat benchmark index returns. Exchange Traded Funds seek to track index returns. Warren Buffett himself said “A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money.”
In addition, the management fees on Exchange Trade Funds are often drastically lower than managed funds.
With ETFs you are likely to acheive superior returns at a fraction of the cost.
