5 Things To Know Before Buying An ETF | Stock Market for Beginners

hey guys and welcome back to the channel so if you're watching this video you are interested in etfs and that is awesome maybe you're making a first-time investment and if that's you welcome to the world of investing get pumped up because it is a good place to be if you're in it for the long run and no doubt etfs are very helpful investment vehicles to build long-term wealth but there are a few sneaky things you may not know about them that i want to talk about in this video so with that said i've got five considerations to talk about so let's roll the intro and get stuck into it [Music] this video is brought to you by sharesight seek of tracking your performance manually track capital gains dividends and currency fluctuations easily and when it comes to tax time have everything you need ready to go with just a click of a button try sharesight for free or use the referral link in the description to get four months free when you sign up to an annual plan okay you're gearing up to buy an etf you're feeling good but as with any investment there are some considerations to make some which you may not even know about so let's get into it number one is fees etfs are weird because you have to pay fees but you don't have to pay fees so what i mean by that is this yes every etf has an annual fee associated with it granted the fees are usually very very low particularly for simple etfs that just track the world's largest markets usually the fees are peanuts for example spy the state street global advisors s p 500 etf which is the world's largest etf has a management fee of 0.0945 percent vas which is the vanguard australian market etf has a fee of 0.1 so they don't charge much and these fees cover all costs associated with the fund custodian fees accounting fees audit fees index license fees all of it all of it in one number but despite the etfs having an annual management fee you don't actually have to physically pay these fees they definitely exist but they're built into the share price so you don't need to send a check to vanguard every year it's all baked into the investment itself which is really handy so that's the first consideration to make the cut that management will take each year and you know it is worth watching this fee because different etf providers will charge slightly different amounts now to save you the pain of researching the biggest etf providers really there are two dominant providers they are blackrock and vanguard for example if we look at say an etf that tracks the s p 500 index blackrock has ivv which has a fee of 0.04 while vanguard has voo currently with an expense ratio of 0.03 percent but having said that there are still plenty of other reputable etf providers such as beta shares state street global advisers invesco charles schwab pro shares etc but as you can see by this chart blackrock and vanguard are definitely your big boys all right that's enough on fees let's move on to the second consideration and this is something personally i had no idea about when i first started buying etfs that is you can buy an etf that tracks an international market on your home exchange so i live in australia g'day mate and i used to think i needed to open an international share trading account just to buy an s p 500 etf not the case at all i can definitely buy an s p 500 etf here on the australian exchange the asx and if you live in america you can probably buy an australian market etf on one of the american exchanges however one thing to note is that if say blackrock provides ivv an s p 500 etf usually the same ticker symbol applies regardless of what market you're actually in so you want to buy this etf from the states you'll be buying ivv but if i wanted to buy the blackrock s p 500 etf here on the asx the ticker symbol is also ivv i mean this makes sense but it can also be say a little bit confusing if you clicked on the wrong link on google so to make sure you're looking at the right version of the etf for your own country just check what exchange it's traded on c here i look at key facts and then you have a look at exchange and look i'm here in america but if we switch over to the australian ivv page we see the exchange asx domicile australia so second consideration you can buy etfs that track international markets from your own home turf on your home exchange you don't need an international trading account okay consideration number three and this one sounds obvious but i have to include it etfs don't always go up now what you would have heard from me in the past or maybe from another youtuber is you know etfs and passive investing is good for about eight percent per year and that is true but it doesn't mean you get eight percent every year what history has told us is that the s p 500 index and most major market indices average out over the long run to about eight percent annually but have a look at this chart this is the australian market historical returns now our market on average has returned about 11 annually for 120 years but look at this bell curve looking chart in most years the chances are you'll get between 10 to 20 return but some years you will make a negative return have a look at the worst year 2008 in that year the australian market lost between 40 and 50 percent so like any stock there is volatility in etfs it's not just a straight line up at 8 per year however history suggests that over a long holding period your return might average out to around seven or eight percent per year but of course you need to hold the market tracking etf4 long enough to let the market do its thing over time over the decades to improve your likelihood of getting that return so that's consideration number three might be obvious but i think it's good to cover nonetheless okay consideration number four is to understand what your strategy is and understand whether the etf you want to buy fits that strategy and what i mean here is that you know a while back etf products were fairly limited they just allowed you broad exposure to say the american market or broad exposure to the australian market or broad exposure to the bond market but now some etfs can be really quite exotic you can buy oil etfs or healthcare etfs you can buy inverse etfs there are a lot of products out there which have the name etf but here's the thing to remember most people use etfs for passive investing passive investing through dollar cost averaging means you buy the market and only the market and you keep buying it at set time periods and you never stop so technically if you're now buying a gold etf and a renewable energy etf you're no longer passive investing you are active investing you are no longer being a market participant you are trying to select individual investments that will do better over time so fourth consideration is with your etfs are you investing passively or actively passive investing is strict you diversify across the whole market and that's it nothing else and that's what we have a hundred years of data for that's where we get our seven to eight percent annual return number from but if we start buying this that and the other then we don't have any level of confidence in our returns going forward could be eight percent could be ten could be negative 10. so think about your strategy what are you trying to achieve with the etfs you're looking at buying so that is consideration number four then lastly we have a huge consideration for etfs that is very frequently overlooked and that consideration is tax you know etfs are an investment when you sell it there are tax implications now with etfs chances are you aren't going to sell for a very long time like decades into the future but you still need to consider the tax implications as soon as you buy them because eventually when you sell you'll have a capital gain event so you need to know when you bought the shares and at what price so when you buy into an etf keep that info handy now of course most brokers have that information automatically stored but if you're going to be holding for a few decades might just be worth saving that info to a place you know you always have access then a few other considerations to make dividend reinvestment plans now it's not super common for etfs to pay you know big fat dividends and it's also not a given that they offer dividend reinvestment options but if they do remember that when your dividend is reinvested automatically that's buying you more shares you'll sell those shares one day and that will be its own little capital gain event so you need to keep track of the buy date and the buy price of dividend reinvestment another consideration to make is that dividend income at least here in australia is considered taxable income and you have to add that to your tax return each year which will mean you have to pay more in tax and beyond that the last consideration is of course when you do want to sell the shares hopefully in the very distant future what tax implication will there be from that capital gain in the year that you sell your shares so if you accumulate a large etf portfolio over decades it might very well be worth seeing an accountant to have them advise you on the most tax effective way to sell down your assets remember at least here in australia your capital gains are lumped on top of your income in the year that you sell the asset the only exemption to that is selling your primary home and the only other little rule that is that for investments that you hold for longer than 12 months only half of the capital gain is taxed so there are many tax considerations that most honestly don't even think about when you buy an etf but they'll definitely get you one day so anyway guys they are my five considerations you may or may not have thought of when it comes to etfs i hope that's helped you um well ideally i hope you know that hasn't helped you i hope ideally you were across all those five considerations already but overall i hope the video uh helped you i hope you enjoyed it um and if you did of course leave a like on the video it really helps out the the video in the youtube algorithm subscribe to the channel if you haven't done so already if you'd like to see more videos on stock market investing you can check out profitful if you'd like a full rundown of the passive investing strategy with etfs uh links are down in the description below if you would like to check that out and it's also financially supporting the channel if that's something that you're interested in doing so i appreciate it but guys that will do us for today thank you very much for watching and i'll see you guys in the next video thanks again to sharesight for sponsoring this video uh so recently i finally decided to stop being lazy and i imported all of my stock portfolios across into sharesight finally i should have done that a hell of a lot sooner so with sharesight you sign up you link your shareside account with your stock 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related subscriptions that i would actually recommend it's very very helpful particularly when it comes to tax time anyway if you did want to sign up simply use the referral link in the description or you can go to sharesight.com forward slash new money and sharesight will give you a special offer of four months free when you sign up to an annual plan so at least sign up for the free plan it will make your life easier but that's it for today guys thanks very much to sharesight for sponsoring this content and i'll see you guys next time [Music]

Channel: New Money

Views: 132,995

Keywords: stock market, stock market for beginners, stock market explained, stock market basics, etf, what etfs to invest in 2021, what etf means, what etf to invest in, what etf should i buy, what etf to buy, what etf to buy now, whats etf stock, exchange traded funds, exchange traded funds explained, exchange traded funds for beginners, etf investing, etfs explained, etf vs index fund, etfs for beginners, etf vs mutual funds, etfs to invest in 2021, passive investing, etfs, stocks

Id: e2yTfW65uC0

Length: 14min 3sec (843 seconds)

Published: Sun Aug 08 2021