Sharlie Raymond is part of a new wave of investors getting their start on the stock market by putting their money into exchange traded funds, or ETFs.
“People maybe 40 and above feel more comfortable with stocks, whereas people 40 and under seem to be a lot more aware of ETFs,” Ms Raymond says.
More than 1.3 million Australians have put their money into ETFs. That is double the number of investors since 2019.
In Australia, most ETFs are passive investments that do not try to outperform the market.
Exchange traded funds are like buying a collection of shares rather than picking individual stocks.
The role of the fund manager is simply to buy shares that track an index like the ASX 200, or a commodity or industry sector, rather than researching individual companies and trying to pick winners.
Therefore the fees are generally much lower than an actively managed portfolio.
Some ETFs provide access to overseas markets like the S&P 500 or the Nasdaq and big tech companies like Facebook, Amazon and Tesla.
As a nervous first-time investor, Ms Raymond saw ETFs as a less risky investment than trying to pick individual stocks herself.
The 29-year-old has put $15,000 into several ETFs that are managed by BetaShares and focused on tech, including the Nasdaq and green companies, with a return so far of about 15 per cent because those sectors have generally boomed during the pandemic.
“I would love to leave a better world for our children and investing in companies that take that into consideration is really important,” she says.
This year marks two decades since the first ETF was listed on the Australian stock market.
There are now more than 200 listed on the ASX.
The total value of ETFs has jumped by 80 per cent to $100 billion in just a year.
The biggest ETF funds in order of funds under management (FUM) are:
|ETF fund||Funds under management (FUM billion) Source: ASX investment products April 2021|
‘Corona-generation’ piling into ETFs
According to BetaShares, 65 per cent of new ETF investors are millennials.
An investor survey by the ASX found 45 per cent of next generation investors planned to buy ETFs in the next 12 months.
Senior lecturer in finance at RMIT university, Angel Zhong, has been studying the investment habits of what she calls the “corona-generation” and its love of ETFs.
“A lot of these people were bored at home and inexperienced so they chose ETFs because they are professionally managed,” she says.
Unlike many managed investments, you invest in ETFs via the ASX – they are bought and sold on the market.
And unlike more traditional investments, you do not need to ask your fund manager to withdraw money. You simply sell your ETF at the going price (assuming there is a willing buyer, of course, which is one of the risks).
However, Dr Zhong has a warning about the growing popularity of “thematic” ETFs, which are different to those that follow a sector and instead select underlying holdings based on their exposure to particular investment themes or ideas.
“For example, tech stocks, they are clearly the market darlings in recent times, and while they are generating good returns for now, you need to be aware that what’s trending today may not be trending even next month,” she warns.
Dr Zhong says diversification is the reason why most investors choose ETFs, and thematic funds can work against that strategy.
“I’ve seen investors making comments that, ‘I love green stocks and sustainable or ethical ETFs so I’m going to buy several ETFs about green investing and sustainable investing’,” she observes.
“But by doing that, you’re actually not diversifying. And if you don’t look at the portfolio composition of the ETFs, you might be actually buying the same stocks in each single ETF.”
New research from the Swiss Finance Institute, published in March this year in a report called Competition for Attention in the ETF Space, backs that up.
The research paper found thematic or specialised ETFs failed to create value for investors compared to broad-based index tracking exchange traded funds.
“On the one hand, investors can now access markets at a low cost. On the other hand, the marketing strategies of specialised ETFs attract speculation-prone investors to underperforming investment propositions,” the paper says.
‘Armageddon’ risk in a market crash
Spotee managing director Elio D’Amato says the biggest risk of ETFs is a market crash.
He says with the biggest ETF in Australia about twice the size of BHP, a crash would lead to a lot of forced selling.
“The most obvious potential massive Armageddon-based risk is if there’s a massive run on an ETF whereby all investors wish to withdraw their funds, because that would [cause] the ETF to engage in forced selling.”
“There could be significant carnage on the exchange … whereby we could see massive corrections of 70 to 80 per cent.”
However, Mr D’Amato says the risk of that happening is low.
“It’s not really in the DNA of an ETF investor to liquidate or sell everything, particularly given the longer-term benefits that they’ve actually achieved for investors for quite some time,” he says.
Long-term investing is a strategy being pursued by Ms Raymond.
“Personally, I don’t think I’m going to withdraw any money from my investment in the next 20 to 30 years,” she says.
“For me, this is a retirement plan.”
ETFs are not part of Dr Zhong or Mr D’Amato’s retirement plans, though.
“As an active manager, I believe I can get an edge over the broader market,” Mr D’Amato says.
“They are good for a first-time investor, but I can put together a diversified portfolio myself,” Dr Zhong says.
Retirees jumping on the ETF bandwagon
Gary Stone has written a book about ETFs and is someone who has put his money where his mouth is.
He has been investing in ETFs since 2013 as part of his self-managed super fund (SMSF) but he has been been researching them for longer.
“I became convinced that they were a game changer in the investing world, for people right across the board, from first timers right through to people that are well into retirement,” Mr Stone says.
There is also now a long list of super funds that allow customers to invest in ETFs.
“The idea of an index ETF is that that management happens on your behalf. You don’t have to worry about an investment in the stock going to zero in the event of a delisting happening,” Mr Stone says.
But, he adds, older investors should be wary of what is called sequencing risk.
There are also currency and geopolitical risks involved in investing in overseas markets.
“A big stock market crash for someone in their 50s, 60s or 70s is a huge risk, compared to a tiny risk for someone in their 20s and 30s who has time for the market to recover,” he says.
There are ways to mitigate against that risk, though, he says.
“As long as you don’t go and put all your capital into one index ETF,” he says.
“It’s the age-old way of approaching investments: you should balance that and look at alternatives that would lessen the fall of your luck on the stock market index.”
It is an investment thousands of other Australians are expected to try their luck at this year.
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