How can investors use ETFs to build a nest egg?

By Lucy Dean

October 06 2017
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Owning a home may seem to be “beyond reach” for many Australians but there are other ways of building a tidy nest egg, BetaShares says.

BetaShares’ chief economist, David Bassanese has argued in a recent report that “it has never been easier or more cost effective” for Australian investors to create a “highly diversified investment portfolio”.

Further, given surging property prices, investors could even find better investment returns by looking outside of property over the next few years.

“For those who feel they may have missed the property boat, it may be an opportune time to build a nest egg outside of the property market – if only because it would leave you better resourced to reconsider your property dreams at a later date,” Mr Bassanese said.

“Additionally, due to the beauty of investment compounding, even relatively small investments could build up quickly over time – especially if income earned is automatically reinvested and regular extra investments are made as part of a systematic savings plan.”

Mr Bassanese offered three steps to build a highly diversified portfolio outside the portfolio market.

These tips are dependent on investors having established a share trading account Mr Bassanese added, warning that the establishment of such an account can be an “administration chore”.

1. Discover the exciting new world of ETFs

“While the ASX has traditionally been a place to buy and sell individual company shares, investors these days don’t need to worry about which stocks to buy if they just want broad exposure to the share market. That’s because investors can buy exchange traded funds (ETFs) instead,” Mr Bassanese explained.

ETFs, or exchange-traded funds, are managed investment funds that can be bought and sold on the ASX. By pooling money from various investors, the proceeds can be used to buy a wide spread of company shares, thus offering investors diversification across the market.

Given that ETFs are passively managed index funds, the “key advantage” to investing in this asset is that as the ETF provider is not actively buying and selling shares on an outperformance basis, the investor does not need a “team of highly paid investment gurus to pick stocks, with the cost saving passed on to investors in the form of relatively low investment management fees”.

Additionally, investors can see what stocks the ETF is holding by visiting the provider’s website, promoting transparency, Mr Bassanese said.

2. Think about your risk appetite

With more than 200 exchange-traded products on the ASX, investors can construct their portfolio to be as simple or complex as they desire.

“What’s more, investors also face a risk-return trade-off: asset classes such as equities and listed property generally offer higher returns than cash or bonds over time, but the returns of the former tend to be much more volatile on a year-to-year basis,” Mr Bassanese added.

Arguing that an ideal portfolio was one that was diversified while still retaining simplicity, he said this could be made up of ETFs that provide “broad index-like exposure” to asset classes like property, bonds and cash, while giving weight to growth assets like equities.

However, the portfolio make-up is dependent on investors’ risk appetite. “In general, investors who are relatively early in their investment careers may be willing to accept more volatile equity exposures – as long-run returns tend to be higher, and they have time to recover from any market dips that may take place over the short to medium term,” Mr Bassanese said.

“That said, all investors can have a different tolerance for investment volatility – irrespective of age,” he continued.

3. Which ETFs do you want to add to your portfolio?

Along with index funds or technology markets, investors can consider investing in the cyber security industry as the “strong and rising global demand for protection against cyber crime” prompts demand for services.

According to Mr Bassanese; “Demand for cyber security services is destined to keep rising, which should help underpin the revenues and profits of companies in this niche tech sector.”

Alternatively, investors can try to “profit from …[their] principles”, as “many young investors” now are, by investing in companies that engage in climate-friendly and socially responsibly policies.

“With rising social and environmental awareness among both investors and consumers, many companies that are climate-change leaders and display good ethical standards also offer the potential to be good investments in their own right.”

Mr Bassanese concluded: “Australia’s ETF market is now so easily accessible by everyday investors that no-one need feel constrained into thinking the only useful investment they can make is through the property market.”

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