One of the common questions I get from new investors is how to buy an Exchange-Traded Fund (ETF), which is actually quite a straightforward process (and I’ve explored in further detail in previous articles). The big question new investors should be asking is which ETF they should invest in. Since I can’t answer that question directly for you, I’m going to highlight some of the questions that you should explore and consider when buying your first ETF in Australia instead.

1) What are your goals and desired end results?

This is an important question to start with because there are hundreds of ETFs out there and you’ll need to narrow down your search. Think about your investment timeframe, what asset class you actually want exposure to and why you’re investing.

2) What are your attitudes towards risk?

If you’re considering investing for the first time, you should spend some time considering your attitude to risk. How would you feel if your investment went down 10%, 20% or even 50%? You don’t want to put yourself in the position where you freak out and sell at the bottom of the market.

3) Which broker do you want to use?

One of the key prerequisites to buying an ETF is having a brokerage account. This is essentially an online “marketplace” where you can buy and sell shares and ETFs, for a small fee of course. You can check out Finder, Canstar and the ASX for lists of brokers in Australia, and compare based on fees, services and international access.

4) What account type do you want to set up?

For most investors, the answer to this will be individual, but it’s a good thing to consider before setting up a brokerage account and purchasing your first ETF. Other account types include joint, company, trust and SMSF, and it’s worth talking to an accountant or financial advisor if you’re not sure which account structure to use.

5) What asset class do you want exposure to?

One of the most important questions to ask yourself while working out which ETF to buy is what asset class you actually want exposure to. Are you trying to invest in Australian shares, gold, government bonds, global healthcare companies or a hedge fund? There’s ETFs to fill every demand now, so to help filter down your search you’ll need to think about what area you want to invest in.

6) Have you looked into the manager of the ETF?

Due to the rising popularity in ETFs both globally and in Australia, many companies have decided to try their hand at running an ETF. Once you’ve narrowed down your search have a look into each of the managers, and what their track record and expertise is. Some of the largest ETF providers in Australia include Vanguard, iShares, BetaShares, VanEck and ETF Securities. Have they had any issues in the past, how long have they been running ETFs for and what is their track record.

7) Do you know the long term performance of the ETF?

Have a look at the ETFs webpage and via the ASX at the historical performance of the ETF. Everyone will always tell you that “past performance is not an indication of future performance”, but taking a look at the past performance versus the index the ETF advises that they track, gives you an indication as to whether the ETF is doing what it says on the label.

I’d also look into the ETFs management fees, and if it’s an active ETF check if there are any performance fees. You can have a look at this calculator to find the long-term effect that fees have of your overall return.

8) Does the ETF have a healthy market capitalisation?

This is probably something that not enough investors look into, but if you search the ETFs ticker code via the ASX, you’ll be able to find out the current market capitalisation (commonly shortened to market cap). If it’s less than $100m I’d certainly keep that in mind and if it’s less than $10m that’s a red flag. Remember, an ETF provider needs to make enough from the ETF to cover a range of costs, including ASX listing costs, audits fees, registry fees and legal costs. They also need to pay for a custodian, market maker and staff fees.

If an ETF has a market cap on $10m and charges 0.8% per year in management fees, it’s running on $80k each year which really doesn’t cover costs at all.

9) Are you comfortable with the ETF and aware of the risks involved?

One of the last things you’ll need to review before purchasing your first ETF, are the specific risks involved with owning ETFs and the asset class you’re investing in. Does the ETF do what it’s supposed to do, what is the risk profile of the asset class in question and do you understand what you are doing?

10) Do you have the money available in the linked bank account?

This is a classic mistake even seasoned investors occasionally make — make sure the money is ready to go when you place the order. Otherwise, you could end up with a late settlement fee from your broker, and nobody wants that.

I hope these 10 questions have given you a few things to consider and research when you go through the process of buying your first ETF.

Kate — HTM Founder & Editor

kate-campbell-how-to-money

Kate Campbell is the founder of How To Money. Kate created HTM from a passion to help young Australians start talking about money, and share the resources she finds along her financial education journey. This led Kate to start her own journey to financial independence a few years back and she now works in the Australian financial services industry.

Want to learn more about money and personal finance? Check out our article archive, the How To Money Podcast and the Australian Finance Podcast. Catch us on Twitter @HowToMoneyAUS and Instagram on @HowToMoneyAUS.

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