Why ETFs are on for young and old

Why ETFs are on for young and old

Making smart moves as a young adult, and using compound interest, can make huge changes in later years. Photo: Dreamstime.com
Making smart moves as a young adult, and using compound interest, can make huge changes in later years. Photo: Dreamstime.com

NOT only are simple but effective exchange traded funds (ETFs) a good way for youngsters to be introduced to investing but, as they have grown up over the years, they also offer many benefits for the more experienced investor.

Old timers who may already have dabbled in ETFs can benefit from the increased variety on offer since the first Australian one was launched by State Street in 2001.

There are now thousands available worldwide that account for more than $US5.2 trillion of assets globally.

Nearly 200 are listed on the ASX while local investors can also access international ones via the United States, where most are listed.

ETFs are a simple concept.

They’re a type of index fund – tradeable on a stock exchange, as their name implies – that initially tracked the performance of a market index such as the S&P/ASX 200 (as did State Street’s first Australian one almost 20 years ago).

Growing up

They have since evolved, through tracking commodities and currencies, to become much more specialised.

And as they have done so, they have moved from being a passive investing tool to an active one.

Investors can now invest in either a broader market or drill right down to such highly specific areas as stocks with minimum volatility or even robotics and marijuana.

A great advantage of ETFs for young people is that smaller amounts can be invested than in a managed fund, which usually want at least $5000. On the other hand, because ETFs are traded on the ASX, the minimum order size is $500 after which smaller amounts can be purchased.

This means that it’s possible for a young investor to start building a healthily diversified portfolio with very little capital.

Or a more seasoned investor can further diversify into new areas.

Pocket rockets

Even smaller amounts can be invested through micro-investing apps that are aimed at tech-savvy youngsters – although of course there’s no age limit!

One of these apps, Raiz, allows you to start an investment portfolio of ETFs with incredibly small amounts of money – literally your loose change.

Your investment account balance increases when payments made by a contactless card (e.g. for a $3.50 coffee) are rounded up to the nearest dollar (or whatever rounding-up you choose). You can also build your micro-investing account by making regular deposits or by depositing a lump sum amount.

Raiz offers a choice of investment portfolios with varying degrees of risk (every investment carries some form of risk, even cash in the bank or under a mattress), each one comprised of several ETFs.

Various fees apply to micro-investing,
so make sure you’re fully aware of these before signing up.

First Step invests small amounts (starting from $1) in a similar way to Raiz; while Spaceship Voyager and CommSec Pocket also allow you to invest small amounts.

Spaceship Voyager has no minimum deposit requirement and doesn’t invest in ETFs but hand-picks stocks for its two investment options; CommSec Pocket has a minimum investment requirement of $50 and allows you to invest in one of seven ETFs.

This combination of variety and small stakes means it’s easy for young investors to build a diversified portfolio while following their interests and passions such as IT or protecting the environment.

Dipping in and out

A great advantage of ETFs is that most of them are very liquid and can be traded throughout the day (unlike index funds which are priced only at the end of the business day). This attribute is especially valued by young investors – and anyone else with limited capital – as they can promptly bail out of a losing investment and conserve their funds. The more sophisticated investor can use their liquidity for intraday trading in a similar way to stocks.

Smart moves

Another advantage of ETFs is the way they make tactical investing easy.

This is especially important now that the set-and-forget strategy of buying a bunch of blue-chip shares and sticking them in the drawer for decades has fallen out of favour.

Rory Tobin, head of global SPDR ETF business at State Street, speaking at an Investment Magazine roundtable sponsored by State Street, said, “If someone is looking for tactical asset-allocation purposes, and someone is making some tactical trades and switches, they will look at the most liquid instrument they can trade the most effectively at the cheapest cost.”

Powerful forces at work

A major investment tactic is to follow megatrends such as advances in robotics, automation and artificial intelligence (RAAI).

An ETF that allows access to this rapidly growing sector is the ETFS ROBO Global Robotics and Automation ETF (ASX ticker: ROBO), which tracks the ROBO Global Robotics and Automation Index representing the entire robotics technology value chain.

One stock it invests in is Japanese industrial robotics firm Yaskawa, a motion-control equipment maker with exposure to the Chinese electric vehicle boom.

Yaskawa is the world’s largest manufacturer of AC inverter drives (that control industrial electric motors), motion-control and robotics automation systems.

Under its famous brand name Motoman, it delivers a wide variety of innovative robot-technology solutions.

Another key stock in the ROBO ETF is Novanta, a US-based advanced technology supplier to the medical and industrial markets.

It has built leading positions in key robotics and automation technologies such as photonics (the use of light beams to store, transfer and manipulate information); precision motion and sensing (vision and RFID) for applications including minimally invasive surgery; DNA sequencing; industrial robotics; warehouse automation; and laser-based material processing.

Others might like to mull over the idea of investing in the nascent marijuana industry, with some Wall Street analysts forecasting annual global sales of anything from
$US50 billion to $US200 billion.

One of the most diversified is the Horizons Marijuana Life Sciences ETF (OTC: HMLSF) with about $C510 million in net assets spread across about 60 holdings.

Think global, act local

Most international ETFs (whether global, regional or single country) are domiciled and listed in the US, then made available for trading in Australia.

Because they are listed in the US, they can’t be traded and settled on the ASX so you don’t directly hold the ETF.

Instead you hold a CHESS Depositary Interest (CDI), which is a security made available for trading on the ASX that “mirrors” the ETF listed in the US.

Although legal title to the international ETF is held by a depositary nominee (CHESS Depositary Nominees Pty Ltd, an ASX subsidiary), CDI holders have all the direct economic and other benefits of holding the underlying international ETFs.

Young Einstein

Youthful investors who invest in ETFs can benefit the most from the magic of compound interest.

Sadly, it’s highly unlikely that Einstein ever said that compound interest is “the most powerful force in the universe” or “the greatest invention in human history” but that doesn’t detract from its immense power.

Its most potent quality is that when you start saving outweighs how much you save.

And an investment left untouched for decades can add up to a large sum, even if you never invest another cent.

The information provided is the opinion of the author. The AJN recommends that readers seek independent financial advice.

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