ETF investments surge ahead, but first check if they’re right for you

About 1.4 million Aussies have bought ETFs since they arrived two decades ago and their value is tipped to double again by 2024.

A big investment anniversary was reached late last week but millions of Australians didn’t get the invitation.

Friday marked 20 years since the first exchange-traded fund launched in Australia, and since then 1.4 million of us have collectively pumped billions of bucks into this fast-growing investment class.

Exchange-traded funds, or ETFs, are also known as index funds and now hold more than $116bn of Australians’ money. These low-fee funds provide investors with instant diversification by spreading their money across a wide range of stocks, often mirroring an index such as the ASX 200 or the S&P 500 in the US.

Today there are several sexy ETFs with stock exchange codes such as ROBO (holding robotics and AI companies), HACK (cybersecurity stocks) and ACDC (lithium and battery technology).

Some ETFs give investors exposure to companies involved in robotics and AI.

Australia’s first ETF, introduced by State Street Global Advisors in 2001, has an incredibly un-sexy name – the SPDR S&P/ASX 200 Fund (code STW). However, its results have been attractive. A $10,000 investment in STW in 2001 is today worth $50,000, thanks to the sharemarket’s good long-term growth and the reinvestment of dividends.

I bought into this ETF about 15 years ago as a long-term investment for my kids, and more recently put most of my superannuation into Vanguard ETFs that diversify across hundreds of companies in Australia and overseas.

They’re the ultimate set-and-forget investment: You don’t have to worry about stock-picking because you’re often buying the entire market. That means you won’t beat the overall index’s investment returns but you won’t get burnt badly if one or two companies crash. ETFs have effectively replaced managed funds, which charge higher fees.

Much of the interest has come from younger generations who are inspired by social media fin-fluencers to mix ETFs with their cryptocurrencies rather than slap cash into a BHP, NAB or AMP.

New research from State Street has found Millennials aged between 25 and 39 are the dominant buyers of ETFs and are forecast to grow the market from $116bn to $226bn within three years. But ETFs are not for everybody. You should perhaps avoid them if:

YOU like picking individual stocks and having a high level of control. ETFs either track an index passively or make limited decisions about what stocks to hold in a sector.

YOU can’t emotionally handle a stockmarket crash. While ETFs diversify your money across an entire index, market downturns will still cost you plenty, like when they halved during the GFC.

YOUR time frame is short-term, such as saving for a house deposit. Shares are not a smart investment for people who will need the money within a few years, and ETFs really just package shares.

While ETFs have become hugely popular among young investors and feature prominently in modern investment platforms such as CommSec Pocket, Raiz and Six Park, one of their biggest fans is a 90-year-old who’s worth more than $140bn.

Investment guru Warren Buffett says an index fund investor who sits tight for decades has long outperformed the major investment funds managers and institutions.

“A major reason has been fees. Many institutions pay substantial sums to consultants who, in turn, recommend high-fee managers,” Buffett says. “And that is a fool’s game.”

Originally published as ETF investments surge ahead, but first check if they’re right for you