Think of ETFs as a shipping container full of investments like shares and bonds. If you invest in an ETF, you buy a share of the entire container and own a tiny slice of every investment in it.
ETFs allow investors to buy many investments in a single order. As the name suggests, you invest your money into a fund, similar to how it would work with a company like Kiwi Wealth.
Rather than picking a handful of individual companies yourself (putting all your eggs in a few baskets), ETFs let you spread your money over tens, or hundreds of investments.
'Diversification' can help you sleep well at night
Diversification simply means owning a lot of different investments. Think of it like this: If you invested $10,000 in Apple shares, you're relying on Apple's share price to increase. If instead, you spread that $10,000 over 20 different companies, your Apple shares now only account for 5% of your investments. If Apple's share price drops, 95% of your investments won't be impacted.
You may minimise the joys of watching a company you've invested in really take off and deliver crazy returns, but on the flip side, if one of the hundreds of companies fails, you aren't as negatively impacted.
Back an industry or trend, not a company
With ETFs, you only need to focus on an industry or trend that you think will grow over time. For example, if you think the Cannabis industry is going to grow over time, you don't need to try to pick which company will do well, you can invest in a bunch of them at once.
Which one should I choose?
Hatch lists over 900 ETFs. Some popular types of ETFs are listed below with a few examples. This isn't an exhaustive list, just a starting point for your research:
Aerospace and defence
These ETFs invest in companies that share their profits with shareholders in the dorm of a dividend (so you earn income from your shares).
As with most things in finance, there are a lot of acronyms. It can be scary even looking at the names of ETFs! As always, Google is your friend. If you want to invest in a particular industry, trend or economy, you can search for 'the biggest/best XXXX ETFs'. Of course you shouldn't blindly follow any one opinion, but you should see a variety of them and be able to form your own opinion. Our Hatch Investors club is also a friendly place to ask for help with your research.
In the meantime, here are some basic terms you should know about:
- Index: An 'index' is a categorised list of investment options, e.g. 'the largest 500 companies on the US share markets', or 'the 10 companies with the highest dividends on the NZX'. These lists are created and managed by companies like Standard and Poor's (S&P) and are often used by investment managers as a benchmark.
- Index fund: These are passive funds that aim to 'track' or mimic an index. Companies like Vanguard and Blackrock create funds like the Vanguard S&P 500 Growth ETF and the SPDR S&P 500 Growth ETF. Both track the same S&P 500 index.
- Passive: A passive strategy means the investment team isn't making active investment decisions to try to beat an index; instead they spend their time replicating an index. Because there's no human expertise involved, passive ETFs usually have lower fees. Fans of passive investing point to evidence that in the long run, it's unusual for an actively managed fund to beat the index, and they prefer the low fees.
- Active: Investment teams or individual experts try to beat an index using their knowledge of companies and the markets. They combine in-depth research, market forecasting, and experience to make decisions. You usually pay additional fees for their expertise and the frequent trading they use to attempt to beat the market. Fans of active investing believe they've picked a smart investment management company that is capable of beating the index. They also feel that when the markets drop in value, active management can limit the impacts by making smart decisions, where passive funds just track the market down.