The five biggest myths about ETFs
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What is an ETF and how does it work?
Welcome to How Do They Afford That, the podcast that peeks into the financial lives of everyday Australians. I'm Michael Thompson, I'm an author and the co-host of the business news podcast Fear and Greed. As always, I'm with Canna Campbell, financial planner, founder of financial literacy platform Sugar Mummer TV, and my co-author on our new book, 12 Months to Financial Freedom, which is out now. Hello, Canna. Good morning, how are you? Yes. I am well, thank you. Sorry, I sounded a bit robotic there, didn't I? But uh yeah, you know what I can't complain. Let's talk ETFs, shall we? Exchange traded funds. So they have absolutely exploded.
There's like something like four or five hundred ETFs now.
Yeah.
In the market.
Yeah. And uh they're just their popularity has just gone exploded nuts. In probably the last decade or so. It's just been uh almost exponential growth. All right. They're often described as the easiest way to start investing because they can give you exposure to a a whole lot of different companies across different sectors and you can spread your risk and help you to kind of track market growth. over a period of time, but there are plenty of myths around ETFs and about how they work. So Today if you are up for the challenge and I'm a
I'm always up for the challenge. You don't even need to ask me.
Well I'll just assume then that you are good to go. We're going to separate fact from fiction with the five biggest myths about ETFs. It feels like a long time since we've done a list and I've missed them. So for those maybe less a bit of background. For those yet to dip their toe into the investing water.
Why do people think they need many different ETFs?
World? If you're dipping your toe into it, it's gotta dip your toe into water. It's like investing water, doesn't feel very appealing, does it? But anyway, uh what exactly is an ETF? Just give us the broad overview.
So I like to think of an ETF as a prepacked shopping trolley or shopping basket. You can go to the supermarket and you can walk up and down the aisles and pick your individual products, your bread, your dairy, uh, your meat, your fish, your vegetables. Light bulbs? Light light bulbs. Right. Yep. Clearly you need to get some light bulbs on the way home. Mental note. But with an ETF, it's like turning up to the supermarket and at the entrance is Is the shopping trolley or shopping busket with everything that you need already pre-packed, ready to go? So you can usually grab it. Pay it, walk out the door, and you're done. You've got everything you need to get you through the week. That's like an ETF. So when you're buying an e an ETF, what it may be, you've got all the investments covered in one transaction.
So you have an instantly diversified portfolio p for that particular asset class that that ETF invests in.
Okay. And that can be across uh different sectors.
Can be well, there's my gosh, there's so many of them now, but you can have one that specializes in say the top two hundred ASX companies, or you could have one that specializes in uh well it follows the index all world. Uh you can have ones that focus, say, on particular regions such as Asia or emerging markets.
Mm-hmm. There's
the
gold miners or things that have got exposure to cryptocurrencies or things that have exposure to AI space.
Space, yep. Yep.
Take your take your pick, really. It's like podcasts. You will find one out there for you. Yes. Right? There just there is so much to choose from. Let's get myth busting. Myth number One.
But you need lots of ETFs. This is something I see quite common where people have lots of different ETFs in their portfolio. ETFs are not shares. Yes, you need a diversified share portfolio between say 20 and 30 different stocks to make sure you've covered different companies, different industries. But with an ETF, it's already diversified. And what we tend to see is when we look at people who've got, say, seven or eight ETFs, they've got duplicates. The portfolios overlap. So essentially they're bought. you know, the same green apple but from they've gone to Woolworths, they've gone to Aldi, they've gone to Coles, they've gone to IGA.
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Chapters
7 chapters
1
What is an ETF and how does it work?
0:01–1:50
2
Why do people think they need many different ETFs?
1:50–4:17
3
Is a “buy‑and‑hold, set‑and‑forget” approach really enough for ETFs?
4:17–7:46
4
Are ETFs actually illiquid and hard to trade?
7:46–11:04
5
Do ETFs replace the need to own individual shares?
11:04–14:10
6
How do ETFs differ from listed investment companies?
14:10–18:13
7
What practical steps should investors take to avoid overlap and stay balanced?
18:13–19:28