You see advertisements about “it” at bus stops. “It” is being reported in the business section of newspapers. I’ve also been receiving many questions about “it” from clients. In case you are wondering, “It” is not Star Wars: The Force Awakens. However, quite like the movie, “it” is the new force of investing.
The “it” I am talking about is Exchange Traded Funds or ETFs for short. While there is currently a lot of excitement around this method of investing (much like Star Wars), ETFs is not exactly new (again, much like Star Wars). According to Wikipedia, ETFs were first available in the US in 1993 and if you are wondering, the first installment of Star Wars was in 1977.
Getting back to topic. The basic benefits for investing in ETFs are clear and easily understood. They include a lower cost of investing, the belief that a passive strategy will outperform an active strategy over a long period of time and you can do it yourself. ETFs are used not just by retail investors but also professional fund managers managing hedge funds or fund-of-funds so it is also something professionals invests in.
However, here is the expected financial planner warning, investing in ETFs do not automatically help you to reach or exceed your financial and investment goals. This is because of what ETFs don’t do.