ETFs are a great way for ordinary savers to invest in the stock market.
The costs are relatively low, you don’t need much capital, and investing in basic share index ETFs doesn’t require expert knowledge.
So if you want a quick, simple and affordable way to invest in the stock market, sure, go ahead!
That was easy. Which ETFs should I choose?
If you’re asking that question, then you probably aren’t quite ready to invest in ruble-denominated ETFs that track Siberian industrial metals.
Instead, you likely want a simple way of getting broad exposure to the stock market. For example, an ETF that tracks the top 40 shares on the JSE is an effective way to reap the rewards of the stock market’s gains without the added risk of investing in individual shares, and without the capital requirement, effort and specialist knowledge needed to build your own diversified portfolio.
The great thing is, there’s no need for a broker, you can do everything yourself with minimal administrative hassle.
What’s the catch?
The most important thing to remember is that investing in equities has inherent risk. Tracking the top 40 or top 100 shares mitigates some of the risk of investing in particular stocks, but it certainly doesn’t eliminate investment risk.
So if you’re looking for a single investment vehicle to put most of your savings into, look for a more balanced fund.
Another consideration is that ETFs tend to be comprise what is known as passive investing. That is, the investment tracks a given index rather than being actively managed by fund managers. Contrast that to a unit trust fund in which the manager is constantly buying, selling and reallocating assets in an effort to maximise gains and mitigate risk.
The upshot is that, in theory at least, ETFs can have lower fees than unit trusts (always ask for a thorough breakdown of all costs before investing).
Star fund managers will respond that they earn their fees by delivering better returns, though that is open for debate. (Fund managers can also do reckless things like expose investors to bad bets.) It’s also worth nothing that although ETF trading fees could add up if you’re planning to make frequent contributions.
Unit Trusts v ETFs
In conclusion, ETFs that track top performing shares are a great way to invest in the stock market. Unit trusts are also great.
The good news is that non-experts have two excellent options for investing in the stock market.
Just always remember: invest with established, reputable funds; past performance is no guarantee of future results; always get a complete breakdown of fees; and if anyone makes you an offer that sounds too good to be true, it almost certainly is.