The Times Australia
Business and Money
The Times Real Estate

.

What do I need to know before investing in ETFs and what are the risks?

  • Written by Angelique Nadia Sweetman McInnes, Academic in Financial Planning, CQUniversity Australia

Exchange-traded funds (ETFs) are tradeable units that have different types of investments all bundled by a professional fund manager into a single investment. In the “bundle” you might have shares, bonds, property investment and other types of investments.

That means people who hold ETFs are investing in a diverse collection of assets across various sectors, markets, companies and regions. With a single ETF you can own a piece of multiple companies or bonds.

They are issued by financial services companies, such as Blackrock, Vanguard, and State Street, and managed by professional fund managers. You can buy and sell units in an ETF fund through a stockbroker; many people use an online broker such as CommSec, CMC Markets, eToro or others.

ETFs can be traded on the Australian Securities Exchange (ASX), or another exchange. The market price of an ETF, which is disclosed daily, will typically follow other benchmarks in the market such as the ASX200 or the S&P500.

ETFs have grown very popular[1] over the last two decades, especially among younger investors[2]. But what are the potential benefits and risks[3] of ETFs?

Read more: What is an ETF? And why is it driving Bitcoin back to record high prices?[4]

What are the potential benefits?

In traditional shares investing, you might research one company and if you believe it will do better, you buy shares in it in the hope its share price rises.

With ETFs, you buy a “bundle” (a number of units) of shares and other securities, that is put together and managed by a professional fund manager. If the market goes up, the value of the ETF should too.

This means investing in ETFs can allow you to spread your risk across a lot of different regions and different markets (such as shares, bonds, property, companies and so on). You aren’t putting all your eggs in one basket. And you can let a professional fund manager worry about selecting the various investments and managing them. You don’t need to be an expert on one particular company or industry.

ETFs also offer flexibility to respond to market trends. They are usually easier to sell quickly than many other types of investments, such as property. This offers freedom to adjust your investment portfolio often and as you like.

Many ETFs that distribute dividends allow the investor to reinvest these dividends automatically to benefit from compound growth over time.

ETFs can also be cost-effective, because the administration is handled by the exchange (such as the ASX).

A person looks at their finance portfolio on their device while lying on a couch.
ETFs also offer flexibility to respond to market trends. Mindful Media/Getty Images[5]

What are the risks?

Like any investment, ETFs carry risk.

A lot depends on the type of ETF and underlying assets in the “bundle”.

If you aren’t careful, you can end up buying a higher-risk ETF without realising it. So it pays to know what types of investments and in what proportions are in your “bundle” (which is known as your asset allocation).

Asset allocation should be aligned with your risk tolerance. Investors have different tolerances for risk depending on their age, financial goals, investment time horizon, preferences and personal comfort with market volatility. Knowing your risk tolerance helps you manage your emotional reactions during market downturns.

A retiree with a likely low tolerance to taking risks might choose an asset allocation that exposes them to low-risk assets. Someone saving for retirement might have more riskier share investments as they aim to grow their nest egg.

Just like shares, ETFs are subject to market fluctuations. If the market experiences a downturn, then the value of the ETF may decline too (depending on what’s in your ETF). Much of the risk depends on what type of assets the ETFs hold.

And in times of market stress, ETFs may not be as easy as they normally are to convert into cash.

Some financial products bought and sold every day on the market include debts or derivatives (futures and options investments). If your ETFs contain in the “bundle” some debts or derivatives, there is always the risk the party on the other side of a financial transaction may default on their debt obligations.

Growth in Australian exchange-traded funds under the management of a professional ETF manager has been robust in recent years. Market capitalisation stood at A$145.83 billion[6] in October 2023, up 13.55% since October 2022.

But before you dive in, remember that ETFs come with their own risks.

Carefully research and select ETFs that are aligned with your investment goals, preferences, time horizon and risk tolerance or see a professional for advice.

Read more: FinTok and 'finfluencers' are on the rise: 3 tips to assess if their advice has value[7]

Authors: Angelique Nadia Sweetman McInnes, Academic in Financial Planning, CQUniversity Australia

Read more https://theconversation.com/what-do-i-need-to-know-before-investing-in-etfs-and-what-are-the-risks-218114

SME Business News

Future-Proofing Your Business with Strategic Defence Insight

In an era marked by rapid technological change, global uncertainty, and evolving security risks, the need for long-term resilience in business has never been greater. Organisations across indu...

Maximise Your Amazon Profits with These 5 Simple Seller Strategies

Selling on Amazon offers countless opportunities for individuals and businesses to grow their income. But with so many sellers joining the platform every day, it’s not enough to just list your ...

Why Professional Mining Electricians Are Critical for Mine Safety and Operations

The mining industry, with its complex and hazardous environments, demands high standards of safety and efficiency. One pivotal role in ensuring these standards is that of professional mining el...

Why is a Commercial Vacuum Cleaner Better?

Maintaining a pristine work area isn't just about aesthetics—it's about fostering an atmosphere of contentment, wellness, and awe-inspiring wholesomeness. Be it an office, a retail outlet, or a...

The Times Features

Best Deals on Home Furniture Online

Key Highlights Discover the best deals on high-quality outdoor furniture online. Transform your outdoor space into a stylish and comfortable oasis. Explore a wide range of d...

Discover the Best Women's Jumpers for Every Season

Key Highlights Explore lightweight jumpers for spring and summer, ensuring breathability and ease. Wrap up warm with cozy wool jumpers for the chilly autumn and winter season...

Uncover the Elegance of Gorgeous Diamond Tennis Necklaces

Key Highlights Diamond tennis necklaces are a timeless piece of jewelry that exudes elegance and sophistication. They feature a continuous line of brilliant-cut diamonds, cre...

Dental Implants vs. Dentures: Which Is Better for You?

When it comes to replacing missing teeth, two of the most common options are dental implants and dentures. Both have their advantages and disadvantages, so choosing between them ...

What Neck Pain Really Means (And Why It’s More Than Just Poor Posture)

Neck pain is often brushed off as something temporary — a tight spot after a long day at the desk or a poor night’s sleep. But when the discomfort keeps returning, it could be a ...

The Work of Gosha Rubchinskiy: Fashion, Culture, and Youth

From Designer to Cultural Architect Gosha Rubchinskiy is not just a fashion designer—he's a cultural force. Born in Moscow in 1984, Rubchinskiy began his career in fashion in t...

Business Times

Future-Proofing Your Business with Strategic Defence Insight

In an era marked by rapid technological change, global uncertainty, and evolving security risks, the need for long-term res...

Maximise Your Amazon Profits with These 5 Simple Seller Strategie…

Selling on Amazon offers countless opportunities for individuals and businesses to grow their income. But with so many sell...

Why Professional Mining Electricians Are Critical for Mine Safety…

The mining industry, with its complex and hazardous environments, demands high standards of safety and efficiency. One pivo...

LayBy Shopping