Are ETFs a lazy man’s investment?

Not so, says Dan Denning in The Daily Recknoning Australia. Although investing in ETFs often means ‘passively’ tracking an index rather then picking a good stock, ETFs carry a number of distinct advantages.

Dan says they are an example of a new product offering from Wall Street that is actually aligned with your interests. They give you more tools to easily trade and own different currencies, markets and asset classes – without excessive management fees…

The great thing about ETFs – in our opinion – is that they give investors the chance to own asset classes that were previously only available to high net worth or institutional investors. Commodity ETFs make it possible to profit from moves in commodities without having to trade in the futures market. There are a lot of fixed income ETFs as well, making it easier to profit from moved in interest rates. And of course there is a whole world of ETFs that slice the market into different sectors and groups, allowing you to own the sectors you like the most, rather than the broad market.

When they work well, ETFs (which trade just like shares) correlate to the performance of an index. Because they are passively managed, you won’t pay a large management fee (typically less than 2%). And in general, they give you the chance to get some geographic diversity in your investments.

Most investors have a home bias, which means most the shares they own are in their own market. That’s not a bad thing, say, when you’re in the middle of the greatest resource bull market in history [...] If you don’t want to have all your eggs in one basket, ETFs give you the chance to pick some different baskets.

They are certainly no panacea, though. A paper claim is just a paper claim. A gold ETF is not gold. And in a global bear market, getting currency or geographic diversity isn’t going to keep stocks from going down. Asset allocation and diversification are endangered species.

But this is one of those rare occasions where a new product offering from Wall Street is actually aligned with your interests. Sure, ETFs are another way for brokerages to make money. But they do give you more tools to easily trade and own different currencies, markets, and asset classes. That’s why they’re worth a look. The product offerings in Australia are still fairly limited. We’ll take a closer look in the future.

By the way, Barclay’s didn’t pay us a cent to write that. We recommended ETFs in our 2004 book The Bull Hunter for all the same reasons listed above. Since then, they’ve become an enormously popular way to trade and invest.

Source: ETFs Are Now Available in Australia