Investing: when NFTs and ETFs do battle, there is only one winner

Exchange traded funds and non-fungible both have confusing names and deliver valuable money lessons, but their future paths look different.

They are investment acronyms with only one letter different, but their impact on people’s wealth has been anything but similar.

In the battle for investors’ hearts and bank accounts, EFTs and NFTs both deliver valuable lessons, although there is just one long-term winner.

ETFs and NFTs are the latest in a long line of acronyms that can confuse Aussie investors.

For example, you can buy ETFs on the ASX but not NFTs, which you instead purchase using BTC or ETH. Here’s another acronym: WTF?

ETF is short-for exchange traded fund, an investment listed on the stock exchange that spreads your money among stocks on an entire share market index or a sector such as robotics, commodities or renewable energy. They are also known as index funds because many mirror a specific index such as the ASX 200 or the S&P 500 in the US.

Exchange traded funds have surged in popularity and number in two decades. Picture: iStock

NFT is short for non-fungible token, a unique piece of digital art, video, in-game item or other data stored on a digital ledger known as blockchain and bought using cryptocurrencies. NFTs went nuts in 2021, with some soaring in value as collectables. Bored Ape Yacht Club NFTs – cartoon-like images of weirdly-dressed chimpanzees – went bananas, rising from $250 to $540,000 in a year, but have since dropped about 80 per cent.

ETFs are now worth about $15 trillion globally and have won praise from successful investors such as billionaire Warren Buffett, while NFTs were owned or promoted by Madonna, Paris Hilton, Snoop Dogg and Eminem.

There’s no law saying that NFTs won’t boom again, like cryptocurrency did in 2017 and 2021, but they still are created from thin air and only given value by what someone is willing to pay. Their so-called uniqueness is lost when creators produce thousands of copies of the same image, video or file to flog them individually online like traditional artists’ prints.

Meanwhile, ETFs remain a relatively new investment type – they’ve only taken off in Australia in the past couple of decades – but are used widely by investors, financial planners and superannuation funds. Management fees are cheaper when an investment tracks an existing index, and low-cost index fund options have emerged everywhere.

Importantly, ETFs haven’t lost more than 80 per cent of their value in the past 18 months.

The biggest lessons from NFTs are around the dangers of putting your money into fads, and expecting that creating something out of nothing will endlessly rise in value. At some point the house of cards collapses.

NFTs are digital assets bought using cryptocurrencies. Picture: Ina Fassbender/AFP I

Experts stay there is a future in blockchain, the technology behind cryptocurrencies and NFTs, but there have been so many NFTs and crypto created in recent years that supply and demand got way out of whack – especially when they don’t deliver any income to investors.

More positive lessons have flowed from ETFs, such as why it’s wise to diversify your investments to smooth out the ups and downs. On the stock market you can buy one company that either succeeds or crashes, or you choose an ETF that manages risk much better.

Some ETFs have entered fad territory and tried to follow the latest trend but performed poorly. ETFs focusing on cryptocurrencies were launched just as the crypto boom turned into a bust. Bad timing there.

The low-cost and diversification benefits of ETFs mean their popularity will continue to boom. NFTs might boom too, of course, but they also may turn into a pile of digital dust.

Originally published as Investing: when NFTs and ETFs do battle, there is only one winner