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Why ETFs make a good investment choice and what to watch

by , 19 October 2015

Exchange traded funds (ETFs) have grown wildly in popularity since their launch 25 years ago. The first South African ETF launched in SA in 2000.

Now ETFs hold around $3 trillion in assets across the globe.

So what makes ETFs a good investment choice? And what do you need to watch when investing in ETFs?

Read on to find out…

The benefits of investing in ETFs

Unlike investing in actively managed funds, ETFs are passive funds. They track an underlying index, rather than try to outdo it like active funds.

With their growing popularity, many experts now believe that ETFs have an impact on market behaviour, Sarah Moore in Money Week explains.

The rise of ETFs is down to:

  • The poor performance of active funds over the longer-term; and
  • The higher charges associated with active funds.

With ETFs seen as the cheaper option by many investors, it’s not surprising why they’re so popular. But in comparison to the $3 trillion in passive funds worldwide, there’s a staggering $16 trillion in active funds just in the US, says Bloomberg.

What to watch when investing in ETFs

The main thing you need to pay attention to when investing in ETFs is the costs.

You want to invest in the ones with the lowest fees. With some funds on the Johannesburg Stock Exchange, there are several ones that track the same indexes, so this makes this choice a bit easier.

You also need to look at tracking error. All ETFs have a fact sheet, like unit trusts do. These detail the performance of an ETF against its benchmark index. If the ETF is widely underperforming its index, you should think twice before investing.

You also should consider the other fees you need to pay. To buy ETFs you need to do it through a stock broker, ETF provider or online ETF platform. All of these options charge fees for their services, so weigh up which option is the best for you.

So there you have it. Why ETFs make a good investment choice and what to watch.

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Why ETFs make a good investment choice and what to watch
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