The growing interest in ETFs
The popularity of exchange traded funds (ETFs) has certainly soared in the past few years. With so many investment options, it may be time to understand them a bit better.
Bought and sold via a stock exchange, ETFs diversify your investment dollars into a portfolio of stocks, rather than focusing on one single asset or share. When it comes to fixed-interest ETFs, the aim of the fund is to match the performance, in terms of price and yield, of the underlying index.
Generally though, a fixed-interest option provides investors with a more reliable income stream and less price volatility than asset classes such as shares, by distributing the income earned on a quarterly basis. Other benefits include:
● Diversification - risk is reduced because the ETF tracks the performance of the portfolio, spreading your money across a number of companies that form the index rather than a single company.
● Cost-effectiveness - ETFs are designed to be low cost so a greater proportion of your money will earn an income. Some also have lower management fees.
● Flexibility - because ETFs trade on the stock market, you can buy and sell at any time, as opposed to waiting until a term deposit has reached maturity to avoid penalty.
Of course, there are also some disadvantages including the fact that an ETF will never exactly match the index, meaning your buy and sell prices may vary, reducing your return. If your ETF of choice is an overseas investment, currency risk and fluctuations of the Australian dollar can also be a disadvantage. Finally, like all investments, ETFs are not immune to market volatility.
Risks specific to fixed-interest ETFs include:
● Credit risk - the issuer of the bonds may fail to pay interest and principal which is why government bonds traditionally tend to be classified as lower credit risk.
● Distribution risk - ETFs are reliant on the income from underlying holdings which means there’s no guarantee a distribution will be paid.
● Tax risk - always investigate what the tax implications are.
● Interest rate movements - falling interest rates may lead to a decline in income, however, a rise in interest rates may mean the price of the bonds falls.
Why the sudden interest?
While ETFs have long been a staple, they’re increasingly starting to take their place on the investment stage. Why? Because they’re transparent, easy to use and a one-stop-shop for investors of any age.
More than this though, there have been global events that have caused investment fret about slowing global growth, especially in the bonds market. This includes US-China trade tensions and interest rate cuts. Fixed-interest ETFs such as the Vanguard Australian and the iShares Core Composite Bond ETF have seen higher returns in the past year than many have seen since inception. The question is, will this continue?
While ETFs are enjoying their time in the spotlight, any investor, no matter how experienced needs to do their research. Investigate the ETF carefully and give us a call when you’re ready to take the plunge. We’ll walk you through the process step-by-step.
My Christmas gift to you
The past and future: how Australia’s economy has fared.
The end of year generally means reflecting back on the year gone and taking stock of important things, like finances, especially as Christmas spending rolls around. So, here’s a round-up of how the economy fared in 2019 and what to look forward to in the future.
Australia comprises just 0.3% of the world’s population, yet in terms of our economy, we’re certainly punching well above our weight, coming in at number 14 globally.
According to the Australian Trade and Investment commission, there are a number of reasons the Australian economy is so resilient. Thanks to robust policy frameworks, a sophisticated financial system and an attractive investment environment, as well as the close proximity to the Asian region and the resulting strong trade ties, Australia has presented with an impressive economic performance.
However, 2019 was not without its economic concerns, especially for the millions of Australians who are living pay to pay, with approximately 46% of Aussies only able to survive a few weeks if they were suddenly without an income. According to research done by the ABC, Australians are also greatly concerned about housing costs and mortgage pressure, the rising cost of living, especially when it comes to the daily commute and the balance between saving for the future and needing to spend today. Many Australians also believe that Generation Z, currently aged between 7 and 21 will be financially worse off than their parents, which is obviously a major concern for the latter. In some further disturbing numbers, 40% of Australians fear they won’t have enough money to retire and almost half of Australians regret not saving more when they could.
Of course, there are some factors to consider though which may negatively impact our economic future, including escalating tensions between the US and China.
Don’t worry though, Australia remains a strong economy, and the good news is that it’s likely to get better, with our little country tipped to realise annual GDP growth of 2.7% per year between 2020 and 2024. This is the highest among major advanced economies.
On top of the advantage of being so close to Asia and benefiting positively from the region’s growth, the diversification of Australia’s economy will continue to assist with strong growth. This includes growth of the services sector which has seen the transition of the Australian economy from mining-related sectors to service sectors, growing on average 3.6% per year since 1992. Of course, the benefit here is that Australia’s output has been driven by service industries such as information media and telecommunication, scientific and technical services, and financial and insurance services.
In terms of the future, Australia is a land of dreamers, which is always a good trait to possess, with 82% of Aussies believing they have the ability to create the life they want. Topping the list of aspirations is full financial freedom and independence, showing Aussies want to support themselves, despite any challenges they may face.
To help fulfill any aspirations or financial goals you have, it’s always a good idea to consult the experts, who will look at your financial history and potential future holistically, working out the perfect plan for you. We can help.
Better investment options for your cash
It’s an oldie but a goodie - never put all your eggs into one basket. But, what’s the best way to grow your wealth?
Saving your money is important. But, putting your money into a savings account, even with a decent interest rate, may not be the best way to grow your wealth.
Diversifying your portfolio across a mix of different investments may help reduce your risk and deliver smoother returns over the long-term. As every asset class is unique, each will be impacted differently by market ups and downs. So by having a broad spread of investments you’re limiting the impact of a single event on your portfolio, which may lead to you achieving greater returns over time.
When constructing your portfolio it’s important to think strategically about your investment mix and your appetite for risk. We can work with you to determine the mix that’s right for you, including some investments that have a higher risk, and therefore a higher reward, as well as some investments with a lower risk and reward. These are called growth assets and defensive assets respectively.
Your investment options
There are plenty of investment options other than a savings account.
● Shares - considered a growth investment, shares are a medium to long-term investment. While your original investment may grow over time, you may also receive income from dividends.
● Property - also a long-term investment option, you can either invest directly in a particular property or indirectly through a property investment fund.
● Exchange traded funds (EFTs) - a managed fund that can be bought and sold on an exchange, such as the ASX. They’re generally easy to buy and sell and have lower fees than other investment options.
● Bonds - these are fixed income assets and generally provide a reliable return. In simplest terms, bonds are an IOU between the borrower and the lender (you). You’ll receive interest payments throughout the period of the bond.
Think outside the box
On top of more traditional investment options, there are some emerging trends. Australia’s alternative finance market continues to grow, hitting over US$1 billion, giving you more ways to invest.
● Peer to peer lending - online platforms are used to navigate connecting investors with companies or start-ups. Interest on the loan is paid, so your original investment grows over time.
● Collectables - things like art, wine, books or vehicles can be classified as a niche area, but if you’re interested or have a passion for these types of items, it’s definitely an area worth investigating. It is important to note that collectables will often take many years to increase in market value, and they don’t typically provide any form of income until you sell them.
Making a decision
Things don’t always go to plan. Occasionally, your investment might take a loss or even fail completely. However, if you have a diversified portfolio, you’re not risking all of your wealth. Talk to us today about why and how you can diversify your portfolio.
By building a plan for how you regularly manage your money, you can reduce the interest you pay to be debt-free sooner.
Ensure your assets go to the right places when you’re no longer around with an estate plan.
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