Savings Account Versus Exchange Traded Fund

Let’s face it; the market isn’t getting any better. The S&P/ASX 200 is down almost 6% this year and the general turmoil is scaring off potential first time investors. If you’re just starting out then the stock market is a pretty confusing place. Even the expert analysts have different views on what you should invest in.

There’s no doubt that it’s tricky to stick to an investment strategy. And it’s even harder for that strategy to work. But it seems generation Y is braving the turbulent waters. Chris Smith, financial planner of the year in 2015, said Gen Y is one demographic that has become more active in margin lending.

OK, but what’s margin lending?

To put it simply, margin lending is when you borrow money to invest in approved shares of managed funds. The amount you can borrow is assessed by the lender. Many items will be assessed and this assessment will determine the size of your loan.

The younger generations have had enough of savings accounts. A common method Gen Y investors follow is to regularly buy shares or managed funds on the market dips.

Often Gen Ys want to save up for a deposit on a house. And the traditional savings account just isn’t cutting the mustard. Not when interest rates are so low anyway. ‘They’ve got pretty significant cash flow and they’re just doing something that will mean they’re going to get there a little bit quicker.’ Mr Smith said.

But the RBA isn’t exactly happy about younger investors ramping up margin lending figures. In December 2007, when the share market was at its peak, margin leading hit all-time highs. Loans for investments totalled $41.6 billion. However, financial institutions are now a bit smarter. Big lenders have been able to cut back figures to $12.3 billion as of September last year.

Another like product of a managed fund is an ETF (exchange traded fund). Unlike a managed fund an ETF trades like stocks, their prices spike and dip throughout the day. An EFT is just a pool of assets. Thus an EFT can hold stocks, commodities, bonds etc.  But what would one look for when investing?

The need to know for ETFs

Some common factors you might want to know about ETFs is their net asset value (NAV). The NAV of an ETF is the sum of all its assets less liabilities and then divided by the number of outstanding shares:

assets

Each ETF trades close to its NAV over the course of the trading day. Gen Y’s trading strategy to buy when stocks drop would be advantageous. If the ETF is below its NAV and they savvy Gen Y investors have the opportunity to buy it for cheaper than its true value.

The advantage of investing in ETFs is for investors to get a great level of diversification. Now the reason I’m saying this is because novice investors don’t know what to invest in. Therefore if you invest $5,000 dollars into a single stock that you haven’t done extensive research on you’ll probably lose most of your investment.

This is why diversification is good for the novice investor. They are able to plop thousands of dollars into an ETF and not worry about losing half of their capital in a week.

Note; ETFs come with fees. Now the fees aren’t extreme. However if you’re just trying to beat the returns of a savings account then management fees can add up.

Let’s take a look at some ETFs trading right now.

ETF Trading

Source: Yahoo finance

The graph above shows four different ETFs compared to the ASX 200 since February last year. Three of the four ETFs seem to outperform the market over the year; however they still appear to be down. The best performer out of the four is ISO, managed by the investment firm BlackRock. Its net assets are valued around $33 million and management fees are 0.55%.

The ETFs seem to have gained 5% returns for investors in the April to June period. But nothing could shrug off the market down turn in July and August. China’s stock market turmoil has a far reaching hand. And even though ETF returns appear to be down, right now could be a time where ETFs are cheap.

The easy nature of an ETF is extremely advantageous to novice investors. All they have to do is put their money into an ETF and watch it occasionally.

Härje Ronngard,

Junior Analyst, Money Morning

PS: If you still don’t like the returns of ETFs but still want to increase your wealth for retirement, a savings account may not be for you. According to Money Morning’s Publisher Kris Sayce there are five specific things you can do to boost your retirement pot.

In Kris’s report ‘5 Things You Can Do To Boost Your Retirement Pot’ he will show you the single most important factor that will determine your retirement size. Kris will also tell you the one question everyone should ask their financial advisor. So take control of your future financial security and download your free copy today. To get your free report, click here.


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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