What is an ETF?

First up, let’s examine what an ETF is. ‘ETF’ stands for ‘exchange-traded fund’, and it’s basically a kind of investment fund.

Within an ETF there’s a range of assets, which could include stocks, bonds, commodities, real estate and currencies, among others. This means that, by investing in an ETF, you can effectively put your money into a diverse collection of assets in a single trade.

ETFs track the performance of an index, sector, commodity or another asset, which is how they go up and down in value. For example, if you invested in iShares Physical Gold ETF, its value would correlate with the rise and fall in the price of gold.

Similarly to individual stocks, ETFs are traded on the stock exchange. (Here in Australia, that’s the ASX.) This means you can buy and sell an ETF throughout the trading day – but more on this process a little further down.

Why buy ETFs?

There are many reasons why investors choose to put their money into ETFs. Beyond their liquidity, ETFs tend to be fairly cost-efficient and have lower expense ratios compared to actively managed funds. They also generally offer greater diversification, given they contain several assets rather than just one.

ETFs are not entirely without their risks, though. Like shares, they’re subject to market volatility. They’re also prone to regulatory risk (where new regulations might impact an entire sector) and tracking error risk (where the performance of an ETF doesn’t match the index it follows).

How to get started with ETFs in Australia

There’s a huge variety of ETFs in Australia. You can choose everything from equity ETFs (which mostly invest in stocks); to dividend ETFs (which offer regular payments to investors); to bond ETFs (which primarily invest in corporate and government bonds). You don't just have to invest in Australian ETFs either; you can also put your money into international ETFs, including those that focus on emerging markets

But before diving in head-first, it’s absolutely worth ticking off a few boxes. Here are some steps to consider taking:

• Figure out your investing goals. What do you want to achieve in your long-term investing journey? Are you keen to build your wealth with growth assets, generate some passive income through dividends or put your money behind specific sectors you believe in? Knowing this will help you determine which ETFs to buy.
• Do your research. Get a firm grip on how ETFs work, how they can fit into your overall investment strategy, and their potential drawbacks. Fortunately, we’ve got a bunch of ETF resources right here.
• Understand your risk tolerance. Investing comes with an element of risk, and how much risk you can handle is known as your risk tolerance. Just like stocks, some ETFs are lower risk, while others carry more uncertainty.
• Research ETF fundamentals. When you’re buying ETFs, performance is just one piece of the puzzle. You also want to look into an ETF’s investing strategy, holdings, costs, and risk factors. You can usually find this information in an ETF’s handbook or prospectus.

How to buy ETFs in Australia

Now to the juicy part: how to buy ETFs in Australia. The process usually looks something like this.

1. Decide how much to invest

There’s no one-size-fits-all figure when it comes to how much to invest. However, you should consider your financial goals, your investment horizon (i.e. the length of time you anticipate holding a particular investment or your portfolio), how much you can afford to invest, and how much risk you’re willing to take on.

To make this calculation a little easier, you can use Pearler’s Investing Amount Calculator to help you figure out your investing budget.

2. Create a brokerage account

As with investing in stocks, you’ll need a brokerage account to buy and sell ETFs. There are numerous brokers to choose from in Australia – including online platforms like Pearler, which caters to long-term investors looking to invest in ETFs and shares.

Make sure to compare things like fees, the ETFs available through the broker, and any additional services the broker offers. If you’re going with an online broking service, you might also want to play around with different platforms to figure out which one you like best.

You’ll need to have funds available in your brokerage account to purchase an ETF.

3. Buy your ETF

This is where you actually buy your share of an ETF. Using Pearler as an example, the process is super simple.

1. Once you’ve logged into your Pearler account, choose the ETF you want to buy. Much like with shares, you can use the ETF’s ticker symbol (its unique identifier) to find it or search for it using its name. Alternatively, you can browse different ETFs or use Pearler’s filters.
   
2. Next, click Buy and plug in how much you want to invest in that ETF. You’ll do this using a dollar amount. Alternatively, you can add the ETF to your Dashboard.
   
3. You’ll then be asked to review your order before confirming it.

Hey presto, you’ve bought your first ETF!

How can I automatically buy ETFs?

Automated investing is another way to buy ETFs, and it doesn’t require you to actively manage each purchase.

Instead, automated investing is a more hands-off investing approach. It lets you choose a set amount to invest at certain intervals – such as weekly or monthly – and the purchase is executed automatically by your chosen platform.

Aside from the convenience of automated investing, another advantage is that you can benefit from Dollar-Cost Averaging (DCA). This is where you invest a fixed amount at regular intervals. DCA allows you to purchase more shares when the price is down and fewer when the price is up. It also helps you avoid having to time the market, which can be tricky for newer investors (and a headache for most investors). Lastly, it enables you to invest smaller amounts at each interval rather than requiring a hefty lump sum.

Numerous platforms offer the opportunity to invest automatically – including Pearler, which has an Autoinvest function.

Using Autoinvest is easy. You simply need to visit the Automate page, follow the steps and set up your automated investments. You’ll be asked to set your investment frequency and the amount you want to invest at each interval.

(Here’s a handy hint: you can use Pearler’s Shares Investing Frequency Calculator to get an idea of how often you'd like to invest.)

Learn more about the Autoinvest feature and how to use it here.

What are some strategies for investing in ETFs?

As an investor, you’ve got multiple investment strategies to choose from. Some favour short-term wins (perhaps by focusing on high-growth shares) while others are a more long-term game (looking instead at building wealth slowly and sustainably).

Certain strategies may be more appropriate depending on your financial goals, risk tolerance, and current financial situation. Before implementing one, think about reaching out to a licenced financial adviser who can provide tailored advice based on your circumstances.

With that in mind, here are some ETF investing strategies to consider.

• Core-satellite approach, This is where you dedicate the majority of your investment portfolio to more conservative ETFs and a small amount to riskier ones. The former may not provide as high returns, but tends to be stabler. In contrast, the latter has the potential for strong growth, but comes with more risk.
• Dividend investing. Some investors look to produce passive income via dividends. Often this is done by investing directly in companies that provide regular payments to shareholders, but numerous ETFs pay dividends, too.
• Thematic investing. This involves investing in ETFs focusing on particular themes or trends that are poised to perform well. Examples include healthcare, sustainability and tech.
• Ethical investing. Got particular causes you want to get behind, such as sustainability? An ethical investing approach could see you buying ETFs that predominantly focus on these.
• Geographical or asset diversification. Both approaches involve investing in ETFs across different groupings. Geographical diversification would have you investing in ETFs that include assets from different markets (say Australia, the US and emerging markets). Meanwhile, asset diversification is about investing across different asset classes (stocks, bonds, commodities and so on) to reduce risk.

Other considerations when buying ETFs

ETFs can be a great way to invest. However, there are several factors to consider when you’re buying them. These include:

• Fees and other costs. While ETFs are lauded for being fairly low-cost, they’re not without their expenses. As with shares, you’re charged brokerage fees for each trade. ETFs come with management fees, too.
• The tax implications. Depending on the ETFs you invest in, and whether you sell your stake for a profit, you may be liable for certain taxes. Dividends earned from ETFs are subject to income tax, while Capital Gains Tax (CGT) may apply if you profit from the sale of your ETFs.
• Regular monitoring. Like any investment, you should regularly monitor the ETFs within your portfolio. Keep a close eye on your long-term investing strategy and consistently check in with your ETF investments to ensure they’re performing and helping you reach your goals.

Best of luck in your investing journey! If you'd like to hear from other investing who are walking a similar path, head over to the Pearler Exchange.