How to boost your retirement income
Ilan Israelstam, is a founding team member of leading Australian ETF manager, BetaShares and is a Principal of Apex Capital Partners, a financial services investment firm.
Most of us don’t have the time or expertise to find individual stocks that will provide solid returns. Exchange Traded Funds (ETFs) trade like shares on the ASX and offer a simple way of diversifying your portfolio to bridge this gap. It’s easy to see why ETFs are fast becoming a popular investment choice.
To get you up to speed, we look at what ETFs are, how they work, and why you may want to include them in your retirement portfolio.
What are ETFs?
An ETF or Exchange Traded Fund is an open-ended investment fund that can be bought and sold on the ASX (Australian Securities Exchange) – just like any share. Generally, ETFs track the performance of a particular index or asset class.
For example, an ETF may track an index such as the S&P/ASX 200. This means that in one trade, you’re gaining exposure to Australia’s top 200 companies. To get this same kind of exposure before ETFs, you would have to buy shares from each company, or pay higher fees to invest through managed funds.
An ETF typically holds the underlying investments of the fund, whether they are bonds, commodities, stocks, or other assets. This means your returns will closely follow the performance of these investments minus any fees or expenses.
Basically, ETFs provide instant portfolio diversification with added flexibility, much lower fees than investing through managed funds, and if you invest wisely, reduced risk.
Why make ETFs part of your retirement plan?
More and more Australian investors are turning to ETFs to help them achieve their financial goals in retirement. For people looking to generate income in their retirement, investing in certain ETFs can be an attractive option. For example, depending on the income levels required - and appetite for risk - retirees can diversify their income streams across asset classes. From high interest cash through to enhanced equity income, BetaShares has a broad range of funds that aim to provide attractive and regular income.
To break it down, here are the main benefits investing in ETFs:
- They’re cost effective. The aim of an ETF is typically to track the performance of an index or asset class, which means there are no expensive ‘active’ management fees
- They’re simple. ETFs are easy to invest in and will help you gain exposure to a range of investment strategies, geographic regions and asset classes.
- They’re transparent. Daily portfolio holdings, Net Asset Value and other Fund information can be accessed at any time on any day, via the fund manager's website.
- They’re easy to buy and sell. Because ETFs are traded on the ASX, they can be bought and sold during the trading day just like any share.
- They’re SMSF friendly. Do you self-manage your super fund? Good news – ETFs are eligible to be bought inside SMSFs.
Investing made easy
One of the main benefits of investing in ETFs is how straightforward the process is. As mentioned, ETFs are traded in the exact same way as shares, meaning they can be bought and sold at any time during the trading day through a stockbroker or through your online brokerage account.
This means once you’ve done your research and have decided which Fund you want to invest in you just need to use the ASX ticker code of the fund to buy and sell – without any extra paperwork to worry about.
What about the risks? Like all investments, it’s important to understand that ETFs can carry risks. The main risks to be aware of include:
- Market risk. For example, if you invest in an ETF that provides exposure to the broader Australian sharemarket, the value of that ETF will naturally move up or down with the sharemarket.
- Currency risk. For example, if you bought an ETF in Australian dollars but the underlying assets are US based, the value of your ETF could fall in value if the Australian dollar increases against the US (unless that ETF is currency-hedged).
Ultimately, it’s important to educate yourself. For the best chance of generating income in retirement, make sure you invest in ETFs that you think will meet your objectives.
What are your thoughts?
Written by Ilan Israelstam.
Any advice contained in this communication is general advice only. None of the information provided is, or should be considered to be, personal financial advice.