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How to decide if ETFs are for you

by , 26 November 2015

Exchange traded funds (ETFs) are growing in popularity the world over. Since their introduction in South Africa, they have attracted a lot of investment and the number available continues to grow.

So what are the advantages of investing in them? And are they a good alternative to unit trusts?

Let's take a closer look…


The benefits of ETFs

 
There are a number of benefits to investing in ETFs
 
Instant diversification
By buying into ETFs, you gain exposure to a number of stocks with one purchase. Diversification reduces your risk and you benefit from the performance of a market or index as a whole.
 
Cost effective
To achieve the diversification you gain with ETFs would cost you a lot if you tried to achieve the same diversification yourself.
 
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For example, if you invest in an ETF tracking the JSE Top 40 Index, you only pay one transaction fee. If you invested in the 40 largest companies on the JSE yourself, you’d pay 40 transactions fees.
 
Complete transparency
When you invest in ETFs you know exactly what shares you’re investing in and the exposure to each of these. It’s very easy to check the performance of your ETFs too as they trade on the stock market just like shares.
 
Easy to invest in
ETFs are easy to invest in and you can buy them whenever the stock market is open. 
 
This means if you’re buying ETFs you can try to take advantage of intraday lows and if you’re selling ETFs, take advantage of intraday highs.
 

Deciding between ETFs and unit trusts

 
ETFs have gained the reputation as being listed unit trusts. For passively managed unit trusts, this is the case. The differences being that the price of an ETF changes throughout each trading day whilst a unit trust value is calculated at the end of each day.
 
Unit trusts aren’t listed on the stock market, but ETFs are.
 
The major deciding factor comes down to fees. You should compare funds between the two and see how it works out for you.
 
With ETFs you need to pay a stock broker to buy and sell ETFs for you, plus you’ll also have to pay fees for your stock brokerage account. If you don’t plan on investing in any other shares, unit trusts may work out a more cost effective option depending on the management fees charged.
 
So there you have it. How to decide if ETFs are for you.
 
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