ETFs – everything you need to know about exchange traded index funds

I’ve decided to invest some money, but I don’t know where to start…  

You’ve read the 10 Steps to Investing Success, you’ve decided to start investing in your future and you may even have opened a brokerage account. But now that it’s time to hand over your money, you may be feeling confused or overwhelmed. Should you be buying gold? Commodities? Crypto?   

If this is you, read on to find out what your first investment should be and why.   

What are Exchange Traded Index Funds?   

Exchange traded index funds (ETFs) are, put simply, a slice of the world’s economy. A global ETF allows you to buy a portion of the global stock market, as it is proportionately invested in a diverse range of companies based on their size. Exchange traded index funds replicate the performance of the entire stock market and are not dependent on the performance of a single company. This means they usually outperform single stock investments over time – making you richer in the long term.   

Exchange-traded – this means you can trade at any point, meaning your money is always accessible when you need it (but it is usually better to stay invested!)  

Index – this means it will follow a specific measure of the stock market. For example, the MSCI World Fund tracks over 1,500 companies in developed countries across the world.   

Fund – this means thousands of people are putting their money into the same pool so that it can be invested following the index.   

Why should I invest in ETFs?   

The benefits of an ETF are:  

• They are user-friendly. Buying units of one globally diversified index fund is a much easier job than managing stocks of multiple different companies.   
• They are accessible. Regardless of your income, you can invest in index funds using an online broker such as Saxo or IBKR.   
• They are low-cost. Online brokers charge minimal fees, unlike mutual or actively managed funds where the broker will take a percentage of your profit.   
• They generally produce above average returns. ETFs outperform most actively managed funds because they are following a diversified range of companies. There is minimal guesswork from fund managers.   

Wait – these funds have different names but they seem to track the same thing?   

There are two reasons for this. The first is currency – some ETFs will trade in Euro, others in dollars or GBP. Choose the currency which suits your long-term goal and stick with that one. I use Vanguard VWRA because it trades in dollars and I don’t know where I will end up! But I have friends who use Vanguard VWRP because they know they will move back to the UK eventually.   

The other reason is that there are two types of ETF – distributing and accumulating. Distributing ETFs pay out profits so that you can spend the money as you choose, while accumulating ETFs automatically reinvest your profits for you. An example of this is Vanguard VWRD (distributing) and Vanguard VWRA (accumulating) which both track the FTSE All World Index. It is your decision whether you want to enjoy a treat with your profits, or keep the money invested to meet your financial goals.   

Any last crucial tips?  

Actually, yes. As an Irish woman, I always think Irish is best. But in the case of ETFs, Ireland is definitely the stand-out provider. If you are from anywhere in the world except the United States, you should choose an ETF which is domiciled in Ireland. This is because Ireland enjoys unique treaties with both the United States and the EU, allowing investors in Irish domiciled ETFs to reclaim tax on money made from US companies. The ETF does this for you and reinvests the tax without you having to lift a finger.

Additionally, Ireland does not claim any taxes on capital gains from, or dividends paid by, Irish domiciled UCITS ETFs for non-residents of Ireland. You can check if your chosen ETF is domiciled in Ireland by reading its investor profile before you buy.   

Investing in ETFs does sound like a method for success…  

ETFs are a simple way to dip your toe into the investment world. By reducing your fees and the amount of time spent investing, spreading out your money for maximum impact and allowing you to take control of your own assets, ETFs are the Fearless Girl way to start investing.   

Will you be investing in ETFs? Let us know in the comments or tag us on instagram @fearlessgirlfinance_