What is an ETF?Mar 10, 2021
We were thrilled to recently interview the fabulous Danielle Ecuyer about ETF’s and about her new book Shareplicity – A simple approach to share investing!For women who are brand new to investing where is the best place to start?
Answer: The first thing to understand is that investing carries some form of risk. That is, we invest our money on the expectation of a higher return than what is achieved on deposit in the bank. Given how low-interest rates are, many people are turning to share investing to grow their savings. Since 1900 the Australian share market has returned 11.8% p.a. including dividends (income). Even in a low interest rate environment where share market returns may fall to 7% p.a. (including dividend income), with this average return you can double your money every 10 years. If the return is 10% p.a. you can double your money in 7 Years. Share investing allows you to grow your savings for the future, well in excess of leaving it in the bank. Before embarking on any investment, you should do some research and understand what you are trying to achieve (like saving a nest egg) and how often and how much you can invest. To grow your savings, share investing achieves the best results over time.
Why do you like ETFs?
Answer: There are three ways to invest in the share market.
- The most challenging is called direct investing, where you buy individual shares.
- The second is via professional fund managers who invest directly in shares on your behalf, they are usually referred to active fund managers.
- The third is ETFs or exchange traded funds. The benefit of ETFs is they offer investors exposure to the share market (a basket of shares); they are low cost in comparison to active fund managers and because they represent a group of shares, your risk is spread (more eggs in the basket). ETFs can also be bought in relatively small amounts like $500 on the stock exchange. However, just because they are low cost and capture a basket of shares does not mean investing in an ETF is a sure thing. Like all investment products you should seek to understand what you are investing in.
Can you explain what an ETF is?
Answer: An ETF is a financial instrument that is traded on the stock market and represents an underlying basket of shares, such as an index like the ASX200 (the top 200 shares) or a sector (like technology) or themes like ESG (environmental, social, governance). The beauty of the ETF product is that you don’t have to make specific share selections. Instead, you can buy an ETF to suit the index or theme you want exposure to, and the ETF will track the performance of the underlying shares in the index (theme/sector) and pay you the combined dividend (income received) of the underlying shares. It has been proven that active fund managers do not outperform (do better) than the share index after costs over time. As costs are so important to increasing the shareholders return, ETF’s are a growth area for investors, who want exposure to the share market without the risks of selecting individual stocks.
How can you invest in an ETF?
Answer: ETFs are traded on the Australian and other world stock exchanges. To invest in an ETF, you need to either open an online share trading account or have existing access to trade shares through an adviser, investor platform or stockbroker. Once you have decided what your investment strategy is you can start investing your money/savings into the selected ETF/s. It is good to have a predefined strategy- a) how much you can invest; b) how frequently you can invest and c) it is better to reinvest the dividend income to maximise the growth in the funds invested (this is known as compounding). A list of the ETFs listed on the Australian stock exchange can be found at www.marketindex.com.au .
How do you pick which ETF is best?
Answer: The ‘best’ ETF for you will depend on your own personal situation and what you are trying to achieve, i.e. your investment goals. The management cost of the ETF which is clearly stated for each ETF is important (as costs erode your returns) but what is more important is that you understand what you are buying and the reason for buying the ETF. The ETF products available are very extensive, it is worthwhile researching what the ETF is aiming to achieve and what are the underlying securities it owns. The one aspect to watch out for is liquidity, meaning I have a personal preference for ETFs that are larger in size and the shares they invest in have good liquidity levels (the ability to buy and sell them).
How did you end up working in finance?
Answer: After completing my Bachelor of Commerce Degree from UNSW where I specialised in Marketing, Accounting and Economics I was given the opportunity to work at a stock broking firm in Sydney. I started in the Equities Research department specialising in Building Materials, Transport and Food manufacturing shares. Later I moved to London and transferred to Emerging Market equity sales. I originally wanted to enter finance as I was keen to pursue a career that would help me achieve financial independence. The career also gave me the opportunity to live in London and travel the world. I saved a lot of my earnings during my career in property and shares.
What motivated you to write your book?
Answer: I have always wanted to write a book and as I had been involved in share investing both professionally and personally for over three decades it seemed the most logical topic. I also wanted to share my knowledge and experience with people to help them understand and become better share investors. I saw my mother lose a lot of money on a share called Poseidon in the early 1970’s and my book is designed to help people achieve a better understanding of shares, to help them make money, grow their wealth and to stop those crippling life losses from shares that my mother experienced.
Why do you think it is important women invest?
Answer: I am passionate advocate for women learning to invest and to improve their financial literacy. There is research to support women in general do not consider themselves to be good investors. Research conducted by investment banks has also shown even younger women tend to leave investing to the men. However, it is not only important for women to have some control over their savings and money, and the ability to invest to grow wealth; it provides security and financial independence. Women are excellent investors once they develop the confidence to invest and understand what they are trying to achieve. If experience has taught me one thing, I would prefer to lose my own money than paying someone to do it for me! Meaning, as individuals we are often the best person to manage our investments, however it does take some time, experience and confidence; but it is not impossible!
What’s the best piece of financial advice you have been given?
- To invest in yourself and never stop investing in yourself
- Don’t be pushed or persuaded into investing your money with someone or a financial product you do not understand.
- Believe in yourself and don’t be bullied.
- If you get a bad feeling about the investment don’t do it.
- Don’t put all your eggs in one basket.
- Learn to understand risk, i.e. the difference between high risk/high reward
What does the book cover and who is it for?
Answer: Shareplicity is designed for both new and existing share investors. It covers all the basics of what you need to get started; what is important for share investing; it explains the language and how to understand shares and the share market. It explains how to invest either directly, with active fund managers or with ETFs and it gives different examples of how to build share portfolios for different age groups, personal situations and different end goals. It is basically the one-stop shop for share investing so anyone can get started or improve their knowledge. It has easy to understand examples and funny stories along the way.
Where can we buy this book?
Answer: Shareplicity is available in all good bookstores, including Dymocks. It is available online through Amazon, Booktopia. Signed copies are also available through my website www.shareplicity.com.au and my publisher Major Street Publishing www.majorstreet.com.au
Disclaimer: Shareplicity offers information that is only general in nature. It does not take into account your personal financial situation, needs or objectives. Nor does it take into account the financial needs of any specific person. You should consider your own personal financial situation and needs or seek financial advice before making any decisions based on this information.