ETFs are a great way to diversify your portfolio and get exposure to particular markets and industries. Let's break down the basics so you can start investing in ETFs today.
Key takeaways
ETFs are a popular asset type for investors of all skill levels, and they can be bought and sold just like individual stocks.
Investing in ETFs is easy on a platform like CMC Invest. Simply open an account, do your research and then deposit the funds to make a purchase.
There are a few things you should look for in an ETF, including how it’s structured and managed.
While you are in the ETF research phase, make sure you pay attention to any fees or other expenses that the fund may incur.
How to get started investing in ETFs
Just like investing in individual stocks, it’s actually incredibly easy to invest in an ETF. We’ll cover some of the things you should be thinking about when looking for ETFs further down, but for now, let's walk you through how to buy them.
Open an account
To begin investing in ETFs, the first step is to open an account on a share trading platform such as CMC Invest. Investing in ETFs involves the exact same process as buying individual shares, and with a CMC Invest account you’ll get instant access to stock markets around the world.
Research
Before making a new investment, research is essential. Think about whether the funds suit your investment goals and risk tolerance. Look into the different types of ETFs, as well as each fund’s underlying assets. The product disclosure statement (PDS) will generally provide you with this information.
Popular ETFs like those that mirror the ASX 200 can offer diversification, while ETFs focusing on specific sectors or trends can give you exposure to certain markets. There are also international ETFs that could widen your investment horizons.
Transfer funds and purchase
Once you have set up your account and done all your ETF research, the next step is to transfer funds from your bank account to your CMC Invest account. This process is simple and can be done via an electronic funds transfer (EFT) or bank transfer. With CMC Invest, you can set up a standard account or link a margin loan with your lending provider for more leverage.
Once the funds have been successfully transferred and have shown up in your CMC account, you can start buying your desired ETFs.
What to look for in an ETF
To help you get started on this exciting journey, here are a couple of things you might want to consider when searching for an ETF to add to your portfolio.
ETF structure
The structure of an ETF refers to its underlying assets and how they're distributed within the fund. Each ETF will have different underlying assets such as stocks and bonds. For example, if an ETF is tracking a particular index, such as the S&P 500, it will hold shares from companies within that index in proportion to how they are weighted in the index.
A diversified ETF will be made up of multiple assets, possibly across different sectors, industries or countries. The reason ETFs strive for diversity is to spread out risk and give investors more balanced exposure to multiple areas – rather than being focused on just a single asset or industry.
By looking into the structure of an ETF, you will have the information at hand to start assessing its risk profile and potential returns. Then you’ll be better placed to know whether it’s a good match for your portfolio!
Fees
There are some fees involved when investing in exchange-traded funds, and they will vary depending on whether the ETF is actively or passively managed. Passive ETFs, which simply aim to mirror an index’s performance, usually have lower fees. Actively managed ETFs, where fund managers make more hands-on decisions, might have higher fees.
While fees might seem like an extra cost, they take care of all the administrative, operational and management expenses that are necessary for the ETF to run. In some cases, these fees could reflect the potential for higher returns or the expertise of active fund managers. It’s up to you whether you invest in ETFs or not, and you’ll need to weigh up whether the cost of fees is balanced out by the potential benefits.