For those new to investing, ETFs offer a simple way to diversify and achieve your long-term objectives without breaking the bank. These funds track a basket of assets, like shares, and are generally less risky than individual stocks. However, there are still various benefits and risks to consider.
Key takeaways
ETFs can help your portfolio become more diversified – with the added benefits of lower costs and greater transparency – compared to other asset types, but there are also risks to consider.
Buying and selling ETFs on platforms like CMC Invest is both easy and flexible.
Potential risks like market volatility and regulatory changes can impact an ETF’s performance.
Be mindful of the currency risks of ETFs when investing in international markets.
Benefits of ETFs
Depending on your investment style and long-term goals, adding ETFs to your portfolio could offer several benefits. Here are a few to consider:
Diversification
ETFs can be an easy way to diversify your portfolio, even if you’re just starting out as a beginner. By holding a basket of different assets – like stocks, bonds or commodities – in a single fund, ETFs may help to spread risk across various investments. This diversification can reduce the impact of a single asset’s poor performance on the overall investment.
Lower Costs
ETFs are generally very cost-effective. For starters, you only pay a single brokerage fee when buying or selling the fund. If you were to buy these assets individually, the costs could really start to add up. Additionally, many ETFs are passively managed, mirroring market indexes like the S&P/ASX 200, which means fund managers aren't actively selecting assets. This often leads to lower management fees.
Convenience
ETFs make investing easy and convenient, especially for beginners. Since they're traded on stock exchanges, you can trade entire markets in a single transaction, giving you the flexibility to buy or sell them whenever you need to. This can be handy for tax time and reporting. Plus, many ETFs automatically adjust their holdings, making investing simpler by taking care of things like adding new stocks for you.
Risks of ETFs
While there are indeed benefits of ETFs for many investors, there are also risks to consider. Only by understanding both the risks and benefits will you be in the best position to make the right choice for your portfolio. Here are some potential risks to be aware of:
Market risk
While they do provide diversification opportunities, ETFs aren’t completely immune to the ups and downs of the market. Market volatility affects ETF performance because it impacts the underlying assets. Therefore, shifts in the market can influence an ETF’s performance. For example, if the S&P/ASX 200 Index declines, the value of an ETF tracking it will also decrease.
Regulatory risk
You’ll want to stay across taxes and rule changes set by governments in whichever stock exchange you are investing in. These can very easily impact an ETF's underlying securities. If a government changes its tax laws or regulations, it could alter the value of assets within the ETF, potentially impacting the overall value of your holdings.
Currency risk
Last but certainly not least, investing in international markets through ETFs might expose you to currency risks. When you invest in a fund from another country, a change in the value of that country's currency relative to your own can impact your investment. For example, if you invest in a fund that operates in Europe and the Euro becomes weaker compared to your home currency, then when it comes time to sell, it might be worth less—even if the stocks in the fund did well.