How to build your own ETF Strategy

An exchange traded fund (ETF) is an open-investment fund that trades on an exchange (such as the ASX). It is a basket of securities that trade the same way stocks do, which means they can be bought and sold on the stock market.

ETFs can be used in your investment portfolio, your superannuation fund, or your SMSF with the aim of diversifying and protecting your investment.

This is because instead of buying a stock in one specific company, an ETF allows you to invest in a range of companies grouped together in a niche or upcoming industry (like Artificial Intelligence or Alternative Energy) to avoid putting all your eggs in one (company) basket.

Number 44 of Forbes’ Top 250 Wealth Advisers Peter Rohr explains why ETFs are so valuable:

“ETFs allow us to control the controllable. We can control fees, we can control taxes, and we can control risk level.” – Peter Rohr

Who are ETFs for?

You may be thinking “That all sounds great but are EFTs for me?”.

Different investment strategies are suited to different people based on their age, income, and goals for the future.

ETFs tend to be cheaper to tap into; in fact, the cheapest one in the world has just a 0.04% ongoing management fee!¹

There is also no minimum investment amount and can be easier to buy and sell compared to stocks.

According to Vanguard², ETF strategies may suit:

investors with a minimum time frame of three years
investors seeking a steady source of income with some capital growth
investors seeking relatively stable returns, with a low probability for loss of capital over the investment timeframe
investors seeking a tax-effective investment

Our Specialist Financial Advisers at Newcastle Financial Planning Group can help you decide whether an ETF investment strategy is the right move for you. Whether you’re after wealth creation or wealth management, we can help you achieve your goals.

Here are 6 types of ETF investments to consider:

1. Bond ETFs

Bond ETFs invest in a variety of fixed-income securities such as corporate bonds or government bonds, allowing you to gain exposure to the benefits of bonds at a low cost.

According to The Motley Fool, “There are hundreds of bond ETFs with various investment objectives, yields, and maturity terms”.³

2. Industry ETFs

An industry ETF is exactly what it sounds like: a pool of stocks of a specific industry.

Within the industry ETF, there are numerous sub-sectors and different companies meaning your investment should be protected from market fluctuations and the rise and fall of specific companies.

Here are the main 11 sectors that ETFs are invested in:

Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Telecommunication Services
Utilities
Real Estate

3. Commodity ETFs

Commodity goods are raw materials such as agricultural products, energy products and precious metals.

Commodity ETFs allow investors to invest in these commodities without necessarily having to invest in one stock directly.

Investing in commodities can be extremely difficult for everyday investors. Financial advice is recommended to ensure you are well protected and getting the best value.

4. Currency ETFs

Currency ETFs allow investors to profit from any changes in foreign currency (for example the buying power of the Australian Dollar compared to the US Dollar).

Investopedia highlights the importance of using ETFs as a diversification strategy:

“It’s important to remember that currency investing should represent a small portion of your overall investment strategy and is meant to soften the blow of currency volatility.”⁴

5. Inverse ETFs

Inverse ETFs are designed in almost the opposite way to every other ETF; they are designed to profit from a decline in the market. Purchasing an Inverse ETF allows investors to make a bet AGAINST the market. If the market falls, the inverse ETF rises by around the same percentage.

Basically, in Australia, inverse ETFs perform well when the ASX performs poorly.

6. Index ETFs

Index ETFs aim to replicate and track a benchmark index (like the ASX) as closely as possible. Investing in an Index ETF allows investors to diversify and gain exposure to many securities in one transaction.

Instead of investing in one asset class or one industry, Index ETFs aim to include as many as possible for maximum diversification.

Interested in investing in EFTs, but not sure where to start? At NFPG, our team of experienced Financial Advisers in Newcastle can provide tailored advice on how to incorporate ETF investment strategies into your Financial Plan.

Whether you’re looking to protect your wealth or grow your income, financial advice from Newcastle’s leading financial advice and wealth management company can help you achieve your goals sooner.

Ready to plan your ETF strategy?

If you’re ready to invest in a well-researched ETF strategy, book an initial appointment with one of experienced Financial Advisers. We have offices located in Newcastle (NFPG), Erina (CCFPG) and Sydney CBD (SWA).

REFERENCES:
1 https://www.blackrock.com/au/individual/literature/fact-sheet/ivv-ishares-s-p-500-etf-fund-fact-sheet-en-au.pdf
2 Vanguard Investments Australia (2016). Vanguard ETF Portfolio Strategies. https://static.vgcontent.info/crp/intl/auw/australia/documents/resources/adviser/VanguardETFPortfolioStrategies.pdf
3 https://www.fool.com/retirement/2017/06/24/best-bond-etfs-for-2018-and-beyond.aspx
4 https://www.investopedia.com/investing/popular-etf-types-for-your-portfolio/

DISCLAIMER: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group, Sydney Wealth Advisers, Coastal Advice Port Macquarie and Coastal Advice Ballina Byron are subsidiaries of Coastal Advice Group Pty Ltd which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.

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