Movies like The Wolf of Wall Street have been a kicker to the investment industry. The cars, the drugs, the women... The fast-paced drama of the stock trading floor is far removed from the sedate, simple approach modern investors are now embracing.
ETFs or exchange traded funds, may sound like the jargon used by 80's stereotypes, but they seem to be every new investor’s best friend. They’re one of the most successful financial innovations in the last decade thanks to their role in democratising investing.
With company stocks, people buy a particular shop; with ETFs, they’re buying the whole mall.
Buying an ETF is buying a basket of investments, spreading money across hundreds or even thousands of companies (or gold, property, bonds, etc.) in one purchase. They’re a low effort, low cost, efficient way to invest in an entire industry, trend, economy, or even the share markets as a whole in a single go.
If someone invested $1,000 in Apple shares, they're relying on Apple's share price to increase. Instead, if they spread that $1,000 over 100 different technology companies in an ETF, their Apple shares might now only account for 10% of the total investments. If for some reason, Apple fails and their shares become worthless, 90% of the investment shouldn’t be impacted.
Global fund managers like Vanguard, Blackrock and Ark Invest have mainly been responsible for driving the growth of ETFs making a growing number available to everyday investors.
There are three straightforward ways to consider to start investing in ETFs:
Put your eggs in all the baskets
There are over 7,500 ETFs globally, but well-known investors point to a few popular options to consider:
- S&P 500: These ETFs invest in the 500 largest companies listed on the US share markets, with growth that more-or-less mirrors that of the US share markets. They’ve gained a historical average growth of 10%, tending to double investors' money every seven years.
- Total stock market: Total stock market ETFs enable investments across every company listed on a single share market or on every share market globally. From behemoths like Microsoft to tiny startups, investment returns reflect the growth of thousands of companies. Result? Sleeping easier!
Back what you believe
Thematic ETFs invest in companies grouped by trend, from mobility to millennials, cloud computing to cannabis, green energy to gaming, so everyday investors can back the future they see. They account for more than US$183 billion - more than double any other type of investment - and variety has shot up too.
Tech enthusiasts back how people live every day - the iPhone alarm, Uber to work, Zoom meetings, to dinner-to-the-door services while streaming TV, and a Fitbit-monitored slumber. For environmentalists, healthcare professionals, shopping enthusiasts, and anyone who’s seen Starlink’s progression across a night sky, there’s a megatrend to match every passion.
But, buyer beware! When there’s a lot of noise, investors need to swerve the hype and dig into whether it’s a fad or a realistic longer-term growth opportunity.
Ditch long-term savings account for investments
A benefit of investing in ETFs is they can create good money habits. Just as you contribute to savings, it’s simple to regularly invest in an ETF, for example, every payday. With interest rates sitting at all-time lows, a savings account no longer works to grow money. For investors with a longer-term time horizon, ETFs could be a better option.
Enter ‘dividend aristocrats’. This elite title is bestowed to S&P 500 companies when they increase their dividend every year for 25+ consecutive years. Only one ETF invests exclusively in the 65 companies that currently meet this threshold, aptly titled NOBL. With dividend yields hovering around 2% over the past few years, there are two crucial differences between this ETF and savings accounts:
- Dividends aren’t guaranteed, and amounts can fluctuate.
- Never invest money you might need in a hurry. As share prices change with the share market cycles, the value of the NOBL ETF changes too. It may result in the double win of dividend income and capital growth, but easy-access, short term savings should stay in a savings account.
If worrying about stock-picking is keeping you up at night (and from starting your investing journey), for most investors, ETFs represent an ideal type of vehicle to kickstarting a diversified portfolio.
This article was created by Hatch
This article is written by Kristen Lunman co-founder and general manager of Hatch - a digital investment platform providing Kiwis access to the US share markets. The third of a four part series, Kristen shares her extensive knowledge about investing. Hatch is 100 percent Kiwi-owned and is part of Kiwi Group Holdings Limited, owned by NZ Post, the NZ Super Fund and ACC. This is intended to provide general information only and should not be viewed as investment advice. Before making financial decisions, you may wish to seek independent financial advice.