An ETF aims to passively mimic the performance of an overall index, such as the JSE, by tracking the movements of the underlying basket of shares or assets that make up that index. These instruments differ from actively managed investment products like unit trusts in that they tend to have very low costs as they do not employ portfolio managers to actively buy and sell shares or other securities. An ETF merely incorporates shares or other assets like bonds or commodities on the basis of what their weighting is in the overall index it is tracking.

“ETFs make investing in the markets easier because you don’t have to go out and buy forty separate shares, which can be an onerous and expensive process, or rely on the portfolio manager of a unit trust to do it on your behalf for a fee,” said Dineo Tsamela, Community Manager at Standard Online Share Trading. “You can simply choose the ETF of your liking and it gives you access to the entire index that you wish to track at a very competitive price.”

Nevertheless, one still needs to put considerable thought into which ETF fits your invest goals, just as you would with any other investment vehicle. While ETFs may take the strain out of picking individual stocks, investors still need to keep a close eye on the asset allocation of the particular index they are tracking and ensure that it fits their overall investment needs. Asset allocation is the process of allocating securities from different types of asset classes in proportions that suit your investment outcome, timeline and individual risk profile.

“Someone who has a long-term outlook, is comfortable with risk and is looking for high returns will probably have a larger proportion of equities in their portfolio so an equity-based ETF would be the right choice for someone like this,” said Tsamela. “Someone with a lower risk profile, such as a person nearing retirement, may want a lower equity allocation and greater exposure to bonds or cash. This is why it’s important to look at the fund fact sheet to get an idea of whether a particular ETF fits your risk profile.”

ETFs that track offshore indexes or asset classes are a great way to diversify away from South Africa specific risks, such as sub-par economic growth or domestic political risks. Internationally-focussed ETFs are also a great rand hedge and offer a relatively efficient and cost effective way of shielding your investment portfolio from currency volatility.

“These global ETFs track international indices and give investors the ability to dip their toes in international markets without having to move their money offshore,” said Tsamela. “Nevertheless, it’s always a good idea to review your ETFs once a year, just as you would with other investments. If you have a tax-free investment account, the best time to do this many be towards the end of the tax year, in preparation for the new tax year.”

The top ETF traded on Standard Bank’s Webtrader is a Vanguard ETF – and this is not surprising. Vanguard is one of the largest investment firms in the world, with $5.1-trillion assets under management. It deals almost exclusively with mutual funds and ETFs. Investors will be able to keep a close watch on the underlying securities a particular ETF tracks, their past performance and a breakdown of the fees.

“So if you are looking for less hassle but still want to gain broad exposure to the markets, ETFs may be just what you are looking for,” said Tsamela. “Always be aware of the risks, however, as passive investments will be buffeted by stormy market conditions as much as the underlying securities. As with all investing, sticking to your knitting and being well diversified generally leads to rewards over the long term.”

Source: Webtrader, visit webtrader.standardbank.com