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Chapter 1: What are ETFs and why are they important for investors?
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That means it's not specific to you, your needs, goals, or objectives, so don't act on the information until you've spoken with your financial advisor. You'll find our full disclosure, disclaimer, and link to our financial services guide in the show notes. Kate Campbell, welcome to this episode of the Australian Finance Podcast.
It is wonderful to be back, Owen.
A very special episode today. We are joined by Mini Pizza. Monique, how are you going? Hello. Welcome to the show. We are doing a very special series today, Kate.
Yes, we have decided to put together an ETF investing mini series because many of our listeners have friends and family or they themselves want to invest in ETFs, which are a great tool when people are getting started investing. So we thought we'd put a five part series. So there's going to be one episode every day this week. all about ETF investing. We're going to explain what ETFs are.
So if you're wondering WTF right now and you just have no idea what I'm talking about, we're going to explain what ETFs are, how you invest in them, how you research them, how do you actually choose and overcome decision paralysis and make a choice and start investing and what brokerage accounts you need for ETF investing, all that and more. So you tune in every day this week.
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Chapter 2: How do you start investing in ETFs?
And if you are watching, you probably have a slightly better experience in this series because we are going to use some props. If you're listening, that's cool too. We will walk you through those examples and analogies. We are here in the studio filming. So jump onto the YouTube channel Rask and subscribe while you're there. Yes.
If you want a better experience. And we'll also have a free Google Doc, which is an ETF investing checklist that we'll get through later in this week that you can download with also an ETF research activity as well. So jump in the show notes, everything we mentioned and plenty more resources because we have talked about ETFs a lot and we've got a free course and we've got a membership.
So we've got heaps of resources there. So jump into the show notes. We would recommend listening to this series in order if you are new to ETFs. If you're one of our listeners that have been around for a while now, thank you for listening.
You might want to just jump to whatever's relevant to you, but it might be a good starting point for a discussion with your friends and family who are new to ETF investing, but you're keen to get them involved.
Yes. As many regular loyal listeners will know, you will know, we champion ETF investing. And there are many reasons for that, which we'll cover throughout the series. Even if you have invested in some ETFs, we actually all have, even though Monique's playing the role of a beginner, she has invested in one. Yes. Which is great.
So, you know, you can take this whether you're absolutely brand new, which is fantastic, or if you are experienced, we will cover some of the popular ETFs. So chances are you will own them and we'll get to more advanced types of things towards the end, which are like, how do you put them together? So, Kate, where do we start?
So I think the first thing, before we jump into why we like ETFs and some examples of different types of ETFs, we really need to start with what on earth are ETFs? Yeah.
What is an ETF?
Sounds like a planted question. Yes, yes. We definitely didn't prepare this one earlier. But ETFs. So just breaking down those three letters for the acronym, an exchange traded fund. So what's an exchange? An exchange is a place where you can buy and sell different investments. For example, companies that you might have heard of in Australia like Telstra and BHP.
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Chapter 3: What are the advantages of using ETFs for diversification?
Yeah. So an exchange is a way to buy and sell companies. So a company like Coles is listed on the Australian Stock Exchange, which we call the ASX for short.
Nice.
Okay. The traded part is that you can buy and sell it. I can own coal shares, you can own coal shares, and we can go back and forth as well. You can buy, you can sell. There's a way to exchange value, shares for money, and in this case, exchange traded funds. And then the third part, it's a fund. So it isn't just one company, it's a basket of companies.
So we're going to get to our analogy that we have prepared earlier. Yep. But essentially, a fund has multiple different companies in it or other types of investments, but we'll stick with companies today.
Nice.
Yeah, that makes sense.
So what's our analogy?
All right. So what we pre-prepared earlier... is to explain how you can buy companies and you can also buy exchange traded funds and why we actually like talking about exchange traded funds a lot. I'm going to use a box of favourites. So most Australians would be super familiar with favourites. I'm sure you are. Yes, of course.
It's a thing you just take it to a party. And if you don't have a present for someone, buy a box of favourites.
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Chapter 4: What factors should you consider when choosing an ETF?
So, let's say, for example, there's going to be some rustling here. We've got different types of chocolates in here.
So, we've got Picnic. It could be Coles, Kate. And then we've got Crunchy. What would that be? Like CBO? Yeah.
CBA, Morro could be BHP. Yep. Insert any Australian business here that's listed on a stock exchange. So you can buy individual shares in these businesses. So you could buy one of these.
You buy Morro.
Yeah, you could buy a Crunchy, you could buy a Picnic, you could buy a Morro. But that is, then you have to figure out which one you want to buy. There's so many different chocolates that you could buy and you're not really sure which is the right one, especially as a beginner investor. It can be really hard to make that choice. Yep. Yep.
So you're going, Kate, I kind of want something a little bit easier because I want to invest. I want to invest in great Australian businesses that are growing. But I don't really know if I want the crunchy or the picnic or the morrow. I don't really know what's the best one.
Yeah.
And especially because there's multiple industries. Like there's different variations of Crunchy, like different variations of banks in Australia. So you know maybe you want to invest in banks, but you don't know which one. So a great product in Australia and globally is called the Exchange Trader Fund, which we briefly explained.
But it means that instead of having to decide to buy the Picnic or the Crunchy or the Morrow, You can buy the box that has all the chocolates in one. So you're getting exposure. You're getting access to all the different top 200 Australian companies in one box.
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Chapter 5: How do fees impact your ETF investment returns?
You might want the top 20 Australian companies. You might want the top 500 US companies. You might want, we'll talk about later in the series, thematic ETFs, which might be just robotic companies. So it might just be different variations of Lindt chocolate or something like that. So you can buy different boxes, but in essence, you don't get to pick, you don't get to customize the middle.
You just can get to pick a different box.
Okay. That makes sense.
And so the question, I guess, is like, why would you choose the box then? Yeah. And the box is because you get a bit of everything. You don't have to worry about whether someone likes a crunchy or a cherry ripe or a flake. You just get it all.
Yep. So like what's the main difference between like getting an ETF or just like the one stock?
The big difference is you can get it wrong when you pick. So imagine you're picking something for someone else. And like I said to you before, everyone kind of in the office hated on Turkish Delight. Yeah. I like Turkish Delight. So there's a chance that you get it wrong. Okay.
So by buying a box, you get some that you like, but you also get some that you might not like as much, but hey, at least you got them.
So it's just more of a variation.
Yeah. And it's safer because there's so many of them. All you need to know is someone likes chocolate.
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Chapter 6: What are thematic ETFs and how do they differ from traditional ETFs?
Right? Yeah. So that means there's like 10 out of 200, but then there's the other 190 that could go wrong. Yes. Does that make sense? Yeah. So by buying the basket, you basically guarantee that you get some good ones, you get some okay ones, and then you might get a few bad ones, but the really good ones, they outweigh the bad ones.
Cool. Yeah. It seems like a much safer way to do it when you're just beginning, I guess.
Yeah. And even professionals can use this because if you're a professional investor, like let's say you go see a financial advisor, right? And they hand you a box of favorites. You're probably going to be like, oh, okay, a box of favorites. I don't like Turkish Delight, but hey, I've got the box, right? But if they hand you just Turkish Delight, you're going to be like, well, you got that wrong.
Yeah.
Okay. Right? So it's safer for the person that's also investing for you if you go and see a financial advisor for them just to hand you the box. That's why When you go to a party, you take favourites. You don't just take Turkish delights. Yeah, yeah. That's why this thing was invented. So that's the point too. Like if you're giving it to someone else, it's easier.
Okay, yeah. So everyone wins.
Yeah, yeah, everyone wins. And you can get it wrong, as we'll talk about, but for the most part, it's kind of like the 80-20 rule, right? Yeah, right. You put in 20% of the effort, you get 80% of the reward. It might not be perfect for everyone, but for most people, it's pretty good.
Yeah. And you've probably heard of the phrase, don't put all your eggs in one basket. Of course. Yeah. That kind of applies to this. It's diversification, but it's pre-done for you. So you're getting exposure to lots of different businesses. Nice. And you can buy different boxes to get exposure to different types of
So in Australia, you can buy your favorites to get access to the top 200 businesses. But as an investor, you can also buy a different type of box that gives you access to the top 500 US companies.
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Chapter 7: How can you assess the performance of an ETF?
So you're investing in heaps of different businesses through only a couple of purchases of ETFs.
Yeah, right.
So if you wanted Hershey's, there could be a box for Hershey's if you're investing in the U.S. Or if you wanted to completely change it and you wanted to invest in something different, you could also do that too. So there are ETFs out there that do things that aren't shares. So this would be an example of something that's not chocolate. Okay. So it might be like fruit. Yeah, totally.
Like something totally different. Yeah. And you can basically bundle up most things and put them inside one of these things.
Okay, cool.
Yeah.
Is there a limit to how many ETFs you can have?
There's only 230 in Australia at the time of recording. Because if you think about it, imagine you're going to like a dinner party or you're going to a friend's place and you want to cover all bases. You probably wouldn't buy five different variations of chocolates. You'd probably just buy one. So this is what we talk about when we talk about overlap.
We want to make sure that we're not just buying the same thing again and again and again.
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Chapter 8: What are the next steps for effective ETF investing?
But there's some things maybe like ice cream that you could use from time to time, but you don't want all the time. That we'll also talk about.
Nice. And we tend to call them thematic ETFs. Okay. Because they're like one theme.
Thematic means theme. That makes sense.
Yes, it does. So that's the first reason is they work. Like they've been around for a long time now and they've kind of proven that they can do it. Yeah. And Kate touched on the second thing, which would be that they're pretty simple. So you can just buy the box. Cool. Yeah. You need a brokerage account, which we'll get to, but you can just buy the box.
So it's simpler than just trying to pick what kind of chocolates people like.
Yeah, totally.
Yeah. Kate, what else?
The second reason is that they're really transparent. So when you buy that box of favorites on the back, you know exactly what is in it. You know what all the different companies that you're getting in your ETF are. And that's the case with all ETFs. So before you buy them, you can go to the ETF creator's website and they will tell you exactly what is in that ETF.
So it's not a guessing game here. It's this is what is inside the box. Do I want that? Yes or no. So you can easily make that decision.
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