As an investor, you’ve probably heard about Exchange Traded Funds, often simply known as ETFs. But what exactly are they?
Picture this – you’re at a marketplace, and instead of buying individual pieces of fruit, you buy a basket full of assorted fruits. An ETF works in a similar way. It’s an investment fund comprising a variety of assets, allowing you to buy a whole cluster rather than individual pieces.
When you invest in stocks, you’re faced with a series of choices: which companies or sectors to back, how to diversify your portfolio to safeguard against market volatility, and more. Navigating these decisions can be overwhelming, especially without professional guidance.
That’s where ETFs come in handy. Investing in an ETF automatically diversifies your portfolio by tracking a range of companies or assets bundled together. ETFs can even be themed – for instance, if you’re eco-conscious, you can opt for an ETF focused on environmentally sustainable companies.
Here are some of the perks of ETF Investing:
- Tax Benefits: You can acquire ETFs through tax-free savings accounts, enhancing their appeal.
- Diversification: With exposure to a broad spectrum of companies and asset classes (such as bonds, equities, or property), ETFs inherently diversify your investments.
- Cost-effectiveness: As ETFs are passively managed, the operational costs are generally lower.
- Accessibility: Entry-level investment thresholds are low, allowing anyone to get started, sometimes with as little as a small initial amount.
When our Victus team works with a client to craft their unique investment strategy, here are a few of the important elements that we consider:
Risk Profile: Each asset class – be it equities, bonds, cash, or real estate – carries a different risk level. Your investment portfolio should ideally be balanced across these classes. However, the proportion allocated to each depends on several factors, such as your risk appetite, age, investment duration, and more.
Local vs Offshore: ETFs can offer exposure to both local and international markets. Balancing your portfolio with ETFs tracking both local indices, like the JSE Top 40, and offshore indices, like the S&P 500, can be a wise strategy.
Industry-Specific ETFs: ETFs focused on specific sectors like technology, finance, or property are available, allowing you to tap into industry trends.
Fees: Two ETFs may offer similar returns, but those with lower fees will provide a better net return. The Total Expense Ratio (TER) – which includes management fees and additional costs – is an effective measure to compare ETFs. Lower TER means a more significant share of the returns reaches you.
Fact Sheets: ETFs come with a monthly-updated fact sheet detailing the fund’s composition, risk level, ideal investment period, and TER. Familiarising yourself with this information is crucial for making an informed decision.
ETFs, with their diverse range and potential for customisation, can be a valuable addition to any investment portfolio. Whether you’re a seasoned investor or a newbie, the Victus Group can guide you through the process, ensuring you find the right fit for your financial goals.