How to know which etf to buy
5 Things To Know Before Buying An ETF | Stock Market for Beginners
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hey guys and welcome back to the channel
so if you're watching this video
you are interested in etfs and that is
awesome maybe you're making a first-time
investment and
if that's you welcome to the world of
investing get pumped up because
it is a good place to be if you're in it
for the long run
and no doubt etfs are very helpful
investment vehicles to build long-term
wealth but
there are a few sneaky things you may
not
know about them that i want to talk
about in this video
so with that said i've got five
considerations to talk about
so let's roll the intro and get stuck
into it
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annual plan okay you're gearing up to
buy an etf
you're feeling good but as with any
investment there are some considerations
to make some
which you may not even know about so
let's get into it number one is fees
etfs are weird because you have to pay
fees but you don't have to
pay fees so what i mean by that
is this yes every etf has an annual fee
associated with it granted
the fees are usually very very low
particularly for
simple etfs that just track the world's
largest markets
usually the fees are peanuts for example
spy the state street global advisors s p
500 etf
which is the world's largest etf has a
management fee of 0.0945 percent
vas which is the vanguard australian
market etf has a fee of 0.1
so they don't charge much and these fees
cover all costs associated with the fund
custodian fees accounting fees audit
fees index license fees all of it
all of it in one number but despite the
etfs having an annual management fee
you don't actually have to physically
pay these fees
they definitely exist but they're built
into the share price
so you don't need to send a check to
vanguard
every year it's all baked into the
investment itself which is really handy
so that's the first consideration to
make the cut that management will take
each year and you know it is worth
watching this fee
because different etf providers will
charge
slightly different amounts now to save
you the pain of researching the biggest
etf providers
really there are two dominant providers
they are blackrock and
vanguard for example if we look at say
an etf that tracks the
s p 500 index blackrock has
ivv which has a fee of 0.04
while vanguard has voo currently with an
expense ratio of 0.03 percent
but having said that there are still
plenty of other reputable etf providers
such as beta shares
state street global advisers invesco
charles schwab
pro shares etc but as you can see by
this chart
blackrock and vanguard are definitely
your big boys
all right that's enough on fees let's
move on to the second
consideration and this is something
personally i had
no idea about when i first started
buying etfs
that is you can buy an etf that tracks
an international market on your home
exchange so i live in australia g'day
mate
and i used to think i needed to open an
international share trading account just
to buy an s p 500 etf
not the case at all i can definitely buy
an s p
500 etf here on the australian exchange
the asx
and if you live in america you can
probably buy an australian market etf on
one of the american exchanges
however one thing to note is that if say
blackrock provides ivv an s p 500 etf
usually the same ticker symbol applies
regardless of what market you're
actually
in so you want to buy this etf from the
states you'll be buying
ivv but if i wanted to buy the blackrock
s p
500 etf here on the asx the ticker
symbol
is also ivv i mean this makes sense but
it can also be say a little bit
confusing if you clicked on the wrong
link on google
so to make sure you're looking at the
right version of the etf for your own
country
just check what exchange it's traded on
c here
i look at key facts and then you have a
look at exchange and
look i'm here in america but if we
switch over to the australian ivv page
we see
the exchange asx domicile australia
so second consideration you can buy etfs
that track
international markets from your own home
turf on your home exchange
you don't need an international trading
account okay consideration number three
and
this one sounds obvious but i have to
include it
etfs don't always go up
now what you would have heard from me in
the past or maybe from another youtuber
is you know etfs and passive investing
is good for about eight percent per year
and that is true but it doesn't mean you
get
eight percent every year what history
has told us
is that the s p 500 index and most
major market indices average out over
the long run
to about eight percent annually but
have a look at this chart this is the
australian market historical returns now
our market on average has returned about
11
annually for 120 years
but look at this bell curve looking
chart in most years
the chances are you'll get between 10 to
20
return but some years you will make a
negative return
have a look at the worst year 2008 in
that year
the australian market lost between 40
and 50 percent
so like any stock there is volatility in
etfs
it's not just a straight line up at 8
per year
however history suggests that over
a long holding period your return might
average out to around seven or eight
percent per year
but of course you need to hold the
market tracking etf4 long enough
to let the market do its thing over time
over the decades
to improve your likelihood of getting
that return
so that's consideration number three
might be obvious but i think it's good
to cover nonetheless
okay consideration number four is to
understand
what your strategy is and understand
whether the etf you want to buy
fits that strategy and what i mean here
is that
you know a while back etf products were
fairly limited they just allowed you
broad exposure to say the american
market or broad exposure to the
australian market
or broad exposure to the bond market but
now
some etfs can be really quite exotic
you can buy oil etfs or healthcare etfs
you can buy inverse etfs there are a lot
of products out there
which have the name etf but here's the
thing to remember
most people use etfs for passive
investing passive investing through
dollar cost averaging
means you buy the market and only the
market
and you keep buying it at set time
periods
and you never stop so technically
if you're now buying a gold etf and a
renewable energy etf
you're no longer passive investing you
are active investing
you are no longer being a market
participant
you are trying to select individual
investments that will do better
over time so fourth consideration
is with your etfs are you investing
passively or actively passive investing
is strict you diversify across the whole
market and that's it nothing else
and that's what we have a hundred years
of data for that's where we get our
seven to eight percent annual return
number from
but if we start buying this that and the
other then we don't have any level of
confidence
in our returns going forward could be
eight percent
could be ten could be negative 10. so
think about your strategy what are you
trying to achieve with the etfs you're
looking at buying so that is
consideration number four
then lastly we have a huge consideration
for etfs
that is very frequently overlooked and
that consideration
is tax you know etfs are an investment
when you sell it there are tax
implications now with etfs chances are
you aren't going to sell for a very long
time like decades into the future
but you still need to consider the tax
implications as soon as you buy them
because eventually when you sell you'll
have a capital gain event
so you need to know when you bought the
shares and at what price
so when you buy into an etf keep that
info handy now
of course most brokers have that
information automatically stored
but if you're going to be holding for a
few decades
might just be worth saving that info to
a place you know you always have access
then a few other considerations to make
dividend reinvestment plans
now it's not super common for etfs to
pay
you know big fat dividends and it's also
not a given that they offer dividend
reinvestment options
but if they do remember that when your
dividend is
reinvested automatically that's buying
you more shares
you'll sell those shares one day and
that will be its own little capital gain
event
so you need to keep track of the buy
date and the buy price
of dividend reinvestment another
consideration to make is that
dividend income at least here in
australia is considered taxable income
and you have to add that to your tax
return each year
which will mean you have to pay more in
tax and beyond that the last
consideration is of course when you do
want to sell the shares
hopefully in the very distant future
what tax implication
will there be from that capital gain in
the year that you sell your shares
so if you accumulate a large etf
portfolio
over decades it might very well be worth
seeing an accountant to have them advise
you on the most
tax effective way to sell down your
assets remember at least here in
australia
your capital gains are lumped on top of
your
income in the year that you sell the
asset the only exemption to that is
selling your primary home
and the only other little rule that is
that for
investments that you hold for longer
than 12 months only half of the capital
gain
is taxed so there are many tax
considerations that most
honestly don't even think about when you
buy an etf but they'll definitely get
you one day
so anyway guys they are my five
considerations you may or may not have
thought of when it comes to etfs
i hope that's helped you um well
ideally i hope you know that hasn't
helped you i hope
ideally you were across all those five
considerations already but
overall i hope the video uh helped you i
hope you enjoyed it um and if you did of
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Related queries:
how to know which etf to invest in
how do i know what etf to buy
