Exchange Traded Funds NZ - ETFs Investment
The stock market provides ample opportunities for you to invest your money and grow your retirement funds or your wealth. Stocks, also called shares, are issued by companies so individual and institutional investors can own a small part of them. But keeping up with individual stocks and companies’ performance is a major investment of time and money.
An Exchange Traded Fund (ETF) takes the guesswork out of picking stocks or even picking an industry for your investments. Instead, ETFs collect a basket of stocks that closely follows the performance of a select stock market. They’re a popular investment option for investors seeking the stability of the overall market.
Whether you’re new to investing or you’re looking to explore your investment options, ETFs can be a beneficial component of a diversified portfolio. Learn how they allow you to buy multiple stocks and bonds at once to follow the performance of the market. Discover how ETFs fit into your investment strategy with help from the team at MyFuture.
What Is An ETF?
An Exchange Traded Fund is a recently popularised investment product that is similar to owning shares of a company. ETFs issue units that you can buy just like you’d buy the shares of a company, but they buy you ownership in the fund. ETFs are designed to closely follow the peaks and troughs of the market index on which they are based.
ETFs can be an excellent investment choice for anyone looking to take advantage of the dependable changes in the stock market over time. The value of your investment increases as the overall level of the market increases, though this goes both ways. A crash or shock in the index will also affect your ETF investments in the same way they affect the index.
ETFs are a relatively stable and safe investment due to their composition. By following the performance of a basket of companies, they eliminate the shocks that individual companies may experience due to market conditions or volatility. If you’re thinking about incorporating ETFs into your investment strategy, talk to the financial professionals from MyFuture today.
How Do ETFs work?
The idea of a product that tracks the performance of a major stock index seems like some sort of artificial intelligence or computer algorithm. It certainly can make your life easier. In reality, an ETF is neither of these things.
An ETF mirrors the market or index it is intended to track by owning shares in the companies that make it up. Fund managers purchase shares of the companies to reflect the composition and impact they have on the index. The fund then sells units of the fund itself which should closely follow the ups and downs of the market. If the overall index increases 1%, the ETF should likewise follow this movement and increase 1%.
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What Are The Benefits Of ETFs?
ETFs are an excellent way to insulate yourself from the ebb and flow of the market’s impact on individual companies. They also offer you the ability to diversify your portfolio, lower transaction costs, increase transparency about the fund’s functions, and allow you flexibility in your investment choices.
Diversification
By purchasing a single unit of an ETF, you are in reality gaining ownership in shares of several companies that make up an index. Owning ETF units is inherently diversified, meaning your portfolio is relatively protected from the market influences on individual companies or industries.
Lower Costs
Since fund managers handle the transactions to enable your ETF to buy or sell shares of individual companies, you don’t have individual transaction costs. This also means you don’t have to spend time on investment research or day to day monitoring which have associated costs themselves. Most ETFs will charge a maintenance fee which is a very small ratio of the value of the units that enables them to operate, but since an index fund is not actively traded, these costs are also minimal.
Transparency
ETFs are public investment instruments, meaning all their information is published for public consumption. This means that you’re able to track the progress of your ETF investment, see any changes that take place, and make informed investment decisions based on complete information.
Flexibility
ETFs, unlike mutual funds, are traded just like shares are on a regular stock exchange. This increases your flexibility in buying and selling ETF units since they can be bought and sold on an open market.
What Are The Risks Of ETFs?
Buying or owning ETF units has inherent risks, just like any investment product. As we’ve noted, an ETF is intended to follow the index it tracks, whether that goes up or down. Therefore, ETF ownership does not protect against inflation or losses. ETFs may also be bought and sold at discounts or premiums which do not necessarily reflect the underlying value of the assets.
As with any investment decision, owning ETFs should be a part of a considered and intentional investment strategy with diversified assets. If you think ETFs would be a useful addition to your investments, get in touch with the team at MyFuture to discuss your financial goals and how ETFs might form part of a longer-term financial strategy.