🎙 This week, we’re talking about how you can choose which ETFs to invest in. We’ve talked about the magic of ETFs many times on this show, but when it comes to actually investing in them, it can be hard to choose which ETFs to purchase. There are tons of options out there and it’s easy to get overwhelmed or confused, especially for beginners. So, how do you know which ETFs you should consider investing in? 🤔
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- Producer: Gonzalo Araya
- Editor: Gonzalo Araya
Hey, friends! And welcome back to Girl on FIRE, the financial independence podcast for independent women.
My name is Priya, I’m a Chartered Accountant, an analyst and the creator of Paper Money Co.
I’m also a fierce financial feminist and the host of this podcast. I believe that a woman who is in control of her money, is in control of her life.
This week, I wanted to talk about how to choose which ETFs to invest in. We talked about ETFs way back in episode 17.
And they’re a great way to start investing and diversify your portfolio. They’re the closest thing to millionaire on autopilot you’re going to find.
But there are a lot of options for ETFs out there and sometimes it can be hard to decide which ETFs you want to invest in.
So, today, we’re going to talk about how to choose the ETFs you want to purchase.
When you’re first getting started with investing, this can be a really big stumbling block. And it’s easy to get stuck in a bit of analysis paralysis with all the choices out there.
This is going to be a bit of a quicker episode, but I wanted to leave you with some little nuggets of investing knowledge before season 1 of Girl on FIRE ends at the end of October.
But before we get started, I want to remind you to head to my website — papermoneyco.com/startinvesting to download your free copy of my Investing Starter guide
It’s totally free, you just need to enter in your email address and I’ll send it straight to your inbox.
It gives you a step by step plan to follow to get your finances ready to start investing, including working with a budget, building an emergency fund and paying off debt.
The sooner you can get your foundation set and get those good money management practices in place, the sooner you can start investing and building your wealth.
If you’re really serious about learning to master your money, then it’s the perfect guide for you, and I’d hate for you to miss out on it.
As always, Girl on FIRE is about learning, so whip out your favourite notebook or journal and get ready to take some notes.
Okay, let’s dive in!
Your investing strategy
First up, start with your investing strategy. We talked about how to determine your investing strategy in episode 14.
It’s super important to set your investing strategy before you start actually putting money anywhere. Because you need to know what kinds of risks you’re looking for and what kind of things you want to invest in.
So, if you haven’t listened to that episode yet, I highly recommend you go back and listen to that one first.
And if you have no idea what ETFs are then listen to episode 17 before you move on as well.
Now, your investing strategy will help you narrow down your choices when you’re deciding what to invest in.
I’m going to use myself as an example here. I know that I don’t have the time to research individual stocks right now. And I also know that I want a safer investment that’s well diversified.
So, I invest in ETFs instead of in individual stocks. Now, taking that a step further, I know that I wanted to be invested in the Australian stock market.
Because I get franking credits on my dividends, which is a favourable thing for my taxes. We’ll take a deep dive into franking credits in a future episode.
But it basically means that I get a tax credit for the tax the company I’m invested in paid. And so, I pay less taxes on my dividends.
So, that’s why I like investing in the Australian stock market. But I also want to maximise my returns and diversify geographically as well.
Because I don’t want to hitch my wagon to just the Australian economy. I can make gains all over the world, especially if Australia’s economy is struggling a little when the rest of the world is powering through.
So, I’m also invested in the US market and all other markets around the world. And I can execute this investing strategy with a 3 fund portfolio.
I have played around here and there while learning how to become a better investor.
But the vast majority of my portfolio is invested in VEU which is the world excluding the US, VTS which is the total US stock market and A200 which is the top 200 companies on the ASX.
So, I highly recommend looking at your investing strategy to narrow down your choices a little bit before you actually start reviewing ETFs.
I know that I don’t want to be invested too heavily in a single sector. So, I don’t invest in ETFs that are specifically for construction companies or tech companies or mining companies or financial services companies.
Those ETFs are automatically taken out of the running for me because they don’t align with the broad definition of my investing strategy.
Reviewing potential ETFs to invest in
Now, once you know what kinds of ETFs you’re looking for, it’s time to start shopping around.
And when you’re shopping around for ETFs, there are 3 super important things you need to look out for.
Look at the MER and other related costs
First — the costs. The fund manager like Vanguard or BetaShares that created the ETF is going to charge you a management fee for administration of the fund.
This is usually called a management expense ratio or a MER. And it’s expressed as a percentage that’s applied to the value of your holding. So, for example an ETF might have a MER of 0.4%.
We talked about the MER in episode 17 when we took a deep dive into ETFs. It’s a broad measure of how expensive an ETF is to invest in.
But there may be other costs involved in addition to the MER that are fund specific.
So, when you’re doing your research, make sure you get detailed documentation from the fund regarding what kinds of costs are involved.
Underlying index the fund is tracking
Next, you want to take a look at what the ETF is tracking. What are the underlying assets that this ETF is trying to track?
So, for example, let’s say you’re considering investing in the A200 ETF from BetaShares which is an ETF that tracks the top 200 companies on the ASX — the Australian stock exchange.
And that includes companies like Woolies and Commonwealth Bank.
On the BetaShares website, do some research and see what those 200 companies are. Who’s included?
You’re indirectly investing in those assets, so you need to know what they are. And once you know, you need to determine whether that ETF still aligns with your investing strategy or not.
You might have ETFs that try to track the whole market or a collection of specific types of companies. They might track assets based on different sectors or geographic locations.
Also — sometimes, ETF names can be stupid. And it’s hard to tell what they’re trying to track by just going off the name alone.
So, looking at the underlying assets, the holdings of the ETF will make it a lot clearer and make it easier for you to make a decision.
It gives you transparency into what you’re actually investing in. And if you listened to episode 38 when we talked about socially responsible investing, it means you can see whether what you’re investing in will align with your values and the social issues you support.
Tracking history and tracking errors
Okay, so at this point, you know what your potential ETF is tracking and what it’s going to cost you.
The third important thing you need to consider is the tracking history and any tracking errors of the ETF.
We know that ETFs aim to track an underlying index, right? Whether the performance is good or bad, they’re just trying to match it.
So, you need to consider how well they do that. A tracking error occurs when an ETF isn’t tracking it’s underlying index properly.
You’re basically checking how good the ETF is at doing it’s job. If it has a ton of tracking errors that means it’s doing a poor job and the red flags go up.
If the ETF can’t track the underlying index accurately, then it’s going to be more unpredictable and more volatile.
And it means that the performance of the underlying index isn’t an accurate indication of the performance of the ETF.
Next weeks’ episode
And that’s all I have for you Girls on FIRE today!
My challenge for you this week is to pick some ETFs and do some research on them. Look for the things we talked about — the MER, the underlying assets and the tracking history
Next week is our second last episode of the season and I have a fun little surprise 2-part series to share with you! I’m really excited about it and I think you’re going to get a kick out of it as well.
It’s going to be a super interesting episode so you’re definitely not going to want to miss it.