Asset test: What are ETFs, and should you invest in them?
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When it comes to the world of investing, there’s no denying there are a lot of acronyms. Like, a lot. You can’t take two steps without running into an EBITDA or a CAGR, plus every single company has its own three or four letter ticker to keep track of, like CBA or BHP (though to be fair, these aren’t all acronyms).
But there’s one that pops up more than most: ETF. Standing for exchange-traded fund, these are an immensely popular form of investment that have risen to prominence over the past decade. In Australia alone, investors hold more than $200 billion in ETFs, with around $25 billion added every six months. Worldwide, the total value of ETFs is expected to reach $US14 trillion by the end of the year.
So what are they? Basically, an ETF is a pool of assets all bundled together into one fund, giving investors access to a diverse range of shares (or commodities or another type of asset) in one purchase that can be bought and sold on the stockmarket just like regular company shares.
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Say you wanted to increase your portfolio’s exposure to Australian banks. You could buy shares in each of CBA, NAB and Westpac, etc, or you could buy shares in an ETF that holds some of each. Think of it like an acronym with a bunch of other acronyms inside it.
What’s the problem?
ETFs are everywhere, offering exposure to all sorts of different sectors from the good old ASX, to international shares, tech stocks and even commodities and cryptocurrencies. Their popularity is understandable, as ETFs are generally considered a fairly low-risk and novice-friendly way to invest, providing exposure to a larger portfolio of assets without the need for a huge investment.