How to Invest in ETFs

ETFs are a great way to diversify your portfolio and get exposure to particular markets and industries. Let's break down the basics so you can start investing in ETFs today.

Key takeaways

• ETFs are a popular asset type for investors of all skill levels, and they can be bought and sold just like individual stocks. 

• ETFs can pool together a range of investments from across sectors or regions. 

• Some investors buy into ETFs because they can be cost-effective and transparent. 

• The simplicity of ETFs may be appealing for beginners who may be overwhelmed by choosing individual stocks. 

• While they may help to diversify your portfolio, make sure any new ETF investments are still in-line with your long-term investment goals. 

• There are a few things you should look for in an ETF, including how it’s structured and managed. 

• Investing in ETFs is easy on a platform like CMC Invest. Simply open an account, do your research and then deposit the funds to make a purchase. 

• While you are in the ETF research phase, make sure you pay attention to any fees or other expenses that the fund may incur.

What is an ETF? 

ETFs are investment tools that trade on stock exchanges, just like individual stocks. They are a collection of different assets – such as stocks, commodities, or bonds- bundled together into a single fund. 

Some of the more popular ETFs work by ‘mirroring’ an index, like the S&P 500 or NASDAQ. This mirroring effect means investors can get greater exposure to a wide range of assets within a single investment, therefore spreading their risk across different sectors or markets. 

Many ETFs are passively managed, which means they strive to match the performance of their underlying index rather than trying to outperform it actively. This often results in lower management fees compared to actively managed funds, which we will discuss a bit further down. 

Ultimately, these funds could provide you with a convenient way to diversify your portfolio and get exposed to various asset classes. 

How do ETFs work?  

When you buy an ETF, you’re buying units of the fund, not the actual underlying assets or individual stocks within the fund. 

Units represent the level of ownership of the ETF’s entire holdings. For example, if a fund holds numerous different stocks, then buying a unit of that ETF gives you exposure to all those stocks in the same proportion as they are held within the fund. When the underlying index goes up or down, the value of the ETF generally moves in the same direction. 

Types of ETFs 

Here are just a few of the different types of ETFs and how they work: 

• Index ETFs: These mirror a specific stock index like the S&P 500. They try to replicate how that index is performing by holding similar securities in the same amount. 

• Fixed income ETFs: Investing in bonds or debt securities brings regular interest payments. They are generally less volatile compared to stocks. 

• Currency ETFs: These funds track the value of a single currency or a basket of currencies. With a currency ETF, you can speculate on currency movements or hedge against currency risks. 

• Commodities ETFs: Giving you exposure to commodities like gold, oil, or agricultural products. Depending on the fund, it may be physically backed (i.e. holding the actual commodity) or futures-based (i.e., investing in futures contracts). 

• Sector ETFs: Focused on specific sectors like technology, healthcare, mining or energy. 

Do ETFs pay dividends?

ETFs generally pass on any dividends received from the stocks or bonds in their portfolio. How often and how much an ETF pays its investors can differ according to the underlying assets it holds. 

It’s always a good idea to do your own due diligence before investing in an ETF for the purpose of receiving dividends. You can check the fund’s prospectus or other available documents to find out about its dividend policy and how often it pays out to investors. Dividend yields can vary, so think about your goals and preferences when selecting funds.

How to invest in ETFs in Australia: A step-by-step guide

Just like investing in individual stocks, investing in ETFs is a straightforward process. We’ll cover some of the things you should be thinking about when looking for ETFs further down, but for now, let's walk you through how to buy them. 

1: Open an account with CMC Invest 

To begin investing in ETFs, the first step is to open an account on a share trading platform such as CMC Invest. Investing in ETFs involves the exact same process as buying individual shares, and with a CMC Invest account, you’ll get instant access to stock markets around the world. 

2. Research ETFs 

Before making a new investment, research is essential. Think about whether the funds suit your investment goals and risk tolerance. Look into the different types of ETFs, as well as each fund’s underlying assets. The product disclosure statement (PDS) will generally provide you with this information. 

Popular ETFs like those that mirror the ASX 200 can offer diversification, while ETFs focusing on specific sectors or trends can give you exposure to certain markets. There are also international ETFs that could widen your investment horizons. 

3. Transfer funds and make a purchase  

Once you have set up your account and done all your ETF research, the next step is to transfer funds from your bank account to your CMC Invest account. This process is simple and can be done via an electronic funds transfer (EFT) or bank transfer. With CMC Invest, you can set up a standard account or link a margin loan with your lending provider for more leverage.  

Once the funds have been successfully transferred and have shown up in your CMC account, you can start buying your desired ETFs. 

Investing in ETFs: Things to consider

To help you get started on this exciting journey, here are a couple of things you might want to consider when searching for an ETF to add to your portfolio. 

ETF Structure

The structure of an ETF refers to its underlying assets and how they're distributed within the fund. Each ETF will have different underlying assets such as stocks and bonds. For example, if an ETF is tracking a particular index, such as the S&P 500, it will hold shares from companies within that index in proportion to how they are weighted in the index. 

A diversified ETF will be made up of multiple assets, possibly across different sectors, industries or countries. The reason ETFs strive for diversity is to spread out risk and give investors more balanced exposure to multiple areas – rather than being focused on just a single asset or industry.

By looking into the structure of an ETF, you will have the information at hand to start assessing its risk profile and potential returns. Then you’ll be better placed to know whether it’s a good match for your portfolio!

ETF Fees

There are some fees involved when investing in exchange-traded funds, and they will vary depending on whether the ETF is actively or passively managed. Passive ETFs, which simply aim to mirror an index’s performance, usually have lower fees. Actively managed ETFs, where fund managers make more hands-on decisions, might have higher fees.

While fees might seem like an extra cost, they take care of all the administrative, operational and management expenses that are necessary for the ETF to run. In some cases, these fees could reflect the potential for higher returns or the expertise of active fund managers. It’s up to you whether you invest in ETFs or not, and you’ll need to weigh up whether the cost of fees is balanced out by the potential benefits.

Start investing in ETFs today with CMC Invest by opening an account.

Disclaimer: This article provides general information only. It has been prepared without taking account of your objectives, financial situation or needs. It is not to be construed as a solicitation or an offer to buy or sell any financial instruments, or as a recommendation and/or investment advice. It does not intend to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any financial instruments. You should consider your objectives, financial situation and needs before acting on the information in this article. CMC Markets believes that the information in this article is correct, and any opinions and conclusions are reasonably held or made on information available at the time of its compilation, but no representation or warranty is made as to the accuracy, reliability or completeness of any statements made in this article. CMC Markets is under no obligation to, and does not, update or keep current the information contained in this article. Neither CMC Markets nor any of its affiliates or subsidiaries accepts liability for loss or damage arising out of the use of all or any part of this article. Any opinions or conclusions set forth in this article are subject to change without notice and may differ or be contrary to the opinions or conclusions expressed by any other members of CMC Markets.