Investing in the stock market is one of the best ways to invest and grow your wealth. However it is still daunting for new investors and can be risky too if you don’t know how to choose stocks. Instead you can start investing in ETFs and Index funds for wealth creation. They are the best entry point to investing in the stock market. These are baskets of shares on the stock market. You get the benefits of being in the stock market with less risk. They are easier to choose and transact in.
Different investment options
Investment strategies and plans are a specialised discipline that fund managers and financial advisors focus on. Expert advice and knowledge is important especially if you have large sums to invest with lots of variables to consider. Understanding different types of investments is also important in your financial literacy.
That said you don’t need to make it complicated and consult tons of advisors. If keeping it simple is going to mean starting vs not starting I would go for it. I am a great fan of starting small and learning as you go along. This is exactly what I have done.
Cash in the bank is the simplest and safest but the returns are not good at all. At best inflation but more likely less than inflation. Traditional endowments and unit trusts are often sold by financial institutions but my experience is they cost a lot, promise great returns and deliver poorly. Property is an option but that needs serious commitment and capital.
That leaves stocks and equities but that is complicated right? So what is the easiest way to start investing in equities? It is pretty unanimous that index funds and ETFs are the best way for new investors to enter the market.
Index funds vs Unit Trusts
Unit trusts have been around for almost a hundred years. These were the first types of investments that I ever had as a young adult. I recently discovered how they have evolved overtime. My first experiences with them were of high fees and low returns, not good. But like everything else they have become better over time.
Unit trusts come in many different forms. Here is a good explanation of a unit trust. Traditional unit trusts are multi asset so have a variety of components including bonds, property cash and some equities. Index fund unit trusts are the best type of unit trusts in my opinion. They just have equities so they behave like equity ETFs which behave like shares.
Difference is that index fund unit trusts are easier to buy without the need of a brokerage account. The fees are also very comparable to ETFs as shown by gofreedom.co.za ETF vs Unit trust comparison. This comparison by Satrix is also nice because it compares the two vehicles ETF and unit trusts as like for like from the same institution.
In summary the biggest difference between these two is the way that you buy them. This then has an impact on the fees that you pay and how accessible they are.
What are ETFs and index funds
ETFs are typically single asset so they can be equity ETFs, property ETFs or bond ETFs. I am focussing specifically on equity ETFs but the principles are common to all ETFs.
An ETF is like a basket of shares, bonds or commodities and the basket usually mirrors a market index. In South Africa the best example is Satrix Top 40, Sygnia Itrix Top 40 and Ashburton Top 40. These are 3 different ETFs but they track the same JSE Top 40 index.
ETFs are good to gain exposure to different sectors and asset classes. They are ideal for those new to investing because you save time and money by investing in a single listed investment product. An ETF can be bought or sold in the same way as an ordinary share.
As mentioned there are many different ETFs often tracking the same index. Difference is that they are managed by different companies. This allows you to shop around to see which ones offer a lower investing cost. ETFsa.co.za is a great resource for all ETF related info.
There are also international ETFs so you can get exposure to international markets with South African based international ETFs or buy buying directly into international ETFs. Satrix was the pioneer in ETFs in South Africa and internationally Vanguard is one of the more famous international ETF and index fund providers.
Both the Satrix Top 40 and Satrix MSCI world are available as an ETF or unit trust. As mentioned before the difference is fees and how you buy them.
How to choose an ETF
Do your research before you start investing in ETFs and index funds. Choosing the wrong one will not be the end of the world but it may not adequately suit your needs. There are many different types so before you buy an ETF you need to look at the fact sheet.
The MDD(minimum disclosure document) or fact sheet gives you all the information that you need to know to see what makes up that ETF. It shows the following useful info
- Top companies held by the fund
- Which sectors or regions are represented
- The historical performance vs the index
- The dividend payment history
- The fees charged
- Details of the fund and who administers it
There is also a lot more information on the purpose of the fund its strategy and risk category.
When you look at all of this information you will be able to workout if this ETF will suit your investment needs.
How to invest in ETFs
ETFs are bought just like you would buy an ordrinary stock. They are listed on the relevant stock exchange, have a stock code and trade daily with a price that varies. So you would buy them through a normal brokerage account. But you can also buy them directly from the provider like at www.satrixnow.co.za.
If you use one of the more modern and low cost trading platforms like Easy Equities then you can buy as much or as little of the ETFs as you like. You can also buy them through your banking trading platform or through a stock broker. Anybody can start investing in ETFs and index funds for wealth creation.
The Satrix Top 40 ETF and the Satrix MSCI World ETF can be bought as ETFs via a broker or directly from Satrix as an index fund or unit trust.
Why are ETFs and index funds so popular
You can see that getting into investing through ETFs is the perfect way to get into investing. 10 reasons that make them so great
- Passive investing
- They are transparent
- The investing cost is low
- They are easy to understand
- One transaction buys many stocks
- They are convenient to buy and sell
- You get direct access to the stock market
- Owning ETFs helps you learn about investing
- Dividends earned can be paid out or reinvested
- ETFs are diversified so the risk of choosing the wrong stock is lower
Many people including Warren Buffet advocate for investing in ETFs especially for novices and passive investors. It is not only good for new investors but for a growing number of investors ETFs make up the majority if not all of their portfolios for the reasons mentioned above.
“A low-cost index fund is the most sensible equity investment for the great majority of investors,” said Buffett. “By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.”
It’s really hard to argue with that. So stop with the excuses and start investing in ETFs and index funds for wealth. Invest regularly and watch your money grow and the dividends roll in.
If you are still unsure or need professional advice then consult a professional financial advisor. It will help you make the right decisions and find the right advice for you.