5 Things To Know Before Buying An ETF | Stock Market for Beginners

Hey guys and welcome back to the channel! So if you're watching this video, you are interested in ETFs, and that is awesome! Maybe you're making a first-time investment, and if that's you, welcome to the world of investing! Get pumped up because it is a good place to be if you're in it for the long run. No doubt, ETFs are very helpful investment vehicles to build long-term wealth, but there are a few sneaky things you may not know about them that I want to talk about in this video.

So with that said, I've got five considerations to talk about, so let's roll the intro and get stuck into it.

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Okay, you're gearing up to buy an ETF. You're feeling good! But as with any investment, there are some considerations to make, some which you may not even know about. So let's get into it.

Number one is fees. ETFs are weird because you have to pay fees, but you don't have to pay fees. So what I mean by that is this: yes, every ETF has an annual fee associated with it. Granted, the fees are usually very, very low, particularly for simple ETFs that just track the world's largest markets. Usually, the fees are peanuts. For example, SPY, the State Street Global Advisors S&P 500 ETF, which is the world's largest ETF, has a management fee of 0.0945 percent. VAS, which is the Vanguard Australian Market ETF, has a fee of 0.1. So they don't charge much, and these fees cover all costs associated with the fund - custodian fees, accounting fees, audit fees, index license fees, all of it, in one number. But despite the ETFs having an annual management fee, you don't actually have to physically pay these fees. They definitely exist, but they're built into the share price. So you don't need to send a check to Vanguard every year; it's all baked into the investment itself, which is really handy.

So that's the first consideration to make: the cut that management will take each year. And you know, it is worth watching this fee because different ETF providers will charge slightly different amounts. Now, to save you the pain of researching the biggest ETF providers, really there are two dominant providers: they are Blackrock and Vanguard. For example, if we look at, say, an ETF that tracks the S&P 500 index, Blackrock has IVV, which has a fee of 0.04, while Vanguard has VOO, currently with an expense ratio of 0.03 percent. But having said that, there are still plenty of other reputable ETF providers such as BetaShares, State Street Global Advisers, Invesco, Charles Schwab, ProShares, etc. But as you can see by this chart, Blackrock and Vanguard are definitely your big boys.

All right, that's enough on fees! Let's move on to the second consideration, and this is something personally I had no idea about when I first started buying ETFs. That is, you can buy an ETF that tracks an international market on your home exchange. So I live in Australia - g'day mate! - and I used to think I needed to open an international share trading account just to buy an S&P 500 ETF. Not the case at all! I can definitely buy an S&P 500 ETF here on the Australian exchange, the ASX. And if you live in America, you can probably buy an Australian market ETF on one of the American exchanges. However, one thing to note is that if, say, Blackrock provides IVV, an S&P 500 ETF, usually the same ticker symbol applies regardless of what market you're actually in. So you want to buy this ETF from the States? You'll be buying IVV. But if I wanted to buy the Blackrock S&P 500 ETF here on the ASX, the ticker symbol is also IVV. I mean, this makes sense, but it can also be say a little bit confusing if you clicked on the wrong link on Google.

So to make sure you're looking at the right version of the ETF for your own country, just check what exchange it's traded on. See here? I look at key facts and then you have a look at exchange. And look, I'm here in America, but if we switch over to the Australian IVV page, we see the exchange ASX, domicile Australia.

So, second consideration: you can buy ETFs that track international markets from your own home turf on your home exchange. You don't need an international trading account.

Okay, consideration number three, and this one sounds obvious, but I have to include it: ETFs don't always go up. Now, what you would have heard from me in the past, or maybe from another YouTuber, is, you know, ETFs and passive investing is good for about eight percent per year. And that is true, but it doesn't mean you get eight percent every year. What history has told us is that the S&P 500 index and most major market indices average out over the long run to about eight percent annually. But have a look at this chart: this is the Australian market historical returns. Now our market, on average, has returned about 11 percent annually for 120 years. But look at this bell curve looking chart. In most years, the chances are you'll get between 10 to 20 percent return, but some years you will make a negative return.

Have a look at the worst year, 2008. In that year, the Australian market lost between 40 and 50 percent. So like any stock, there is volatility in ETFs. It's not just a straight line up at 8 percent per year. However, history suggests that over a long holding period, your return might average out to around seven or eight percent per year. But of course, you need to hold the market tracking ETF for long enough to let the market do its thing over time, over the decades, to improve your likelihood of getting that return.

So that's consideration number three. Might be obvious, but I think it's good to cover nonetheless.

Okay, consideration number four is to understand what your strategy is and understand whether the ETF you want to buy fits that strategy. What I mean here is that, you know, a while back, ETF products were fairly limited. They just allowed you broad exposure to, say, the American market or broad exposure to the Australian market or broad exposure to the bond market. But now some ETFs can be really quite exotic. You can buy oil ETFs or healthcare ETFs; you can buy inverse ETFs. There are a lot of products out there which have the name ETF, but here's the thing to remember: most people use ETFs for passive investing. Passive investing through dollar-cost averaging means you buy the market and only the market, and you keep buying it at set time periods and you never stop.

So technically, if you're now buying a gold ETF and a renewable energy ETF, you're no longer passive investing; you are active investing. You are no longer being a market participant; you are trying to select individual investments that will do better over time. So the fourth consideration is: with your ETFs, are you investing passively or actively? Passive investing is strict; you diversify across the whole market, and that's it - nothing else. And that's what we have a hundred years of data for; that's where we get our seven to eight percent annual return number from. But if we start buying this, that, and the other, then we don't have any level of confidence in our returns going forward. Could be eight percent, could be ten, could be negative ten. So think about your strategy. What are you trying to achieve with the ETFs you're looking at buying? So that is consideration number four.

Then lastly, we have a huge consideration for ETFs that is very frequently overlooked, and that consideration is tax. You know, ETFs are an investment. When you sell it, there are tax implications. Now with ETFs, chances are you aren't going to sell for a very long time, like decades into the future, but you still need to consider the tax implications as soon as you buy them because eventually, when you sell, you'll have a capital gain event. So you need to know when you bought the shares and at what price. When you buy into an ETF, keep that info handy.

Now, of course, most brokers have that information automatically stored, but if you're going to be holding for a few decades, it might just be worth saving that info to a place you know you always have access.

Then, a few other considerations to make: dividend reinvestment plans. Now, it's not super common for ETFs to pay, you know, big fat dividends, and it's also not a given that they offer dividend reinvestment options. But if they do, remember that when your dividend is reinvested automatically, that's buying you more shares. You'll sell those shares one day, and that will be its own little capital gain event.

So you need to keep track of the buy date and the buy price of dividend reinvestment. Another consideration to make is that dividend income, at least here in Australia, is considered taxable income, and you have to add that to your tax return each year, which will mean you have to pay more in tax.

And beyond that, the last consideration is, of course, when you do want to sell the shares. Hopefully, in the very distant future, what tax implication will there be from that capital gain in the year that you sell your shares? So if you accumulate a large ETF portfolio over decades, it might very well be worth seeing an accountant to have them advise you on the most tax-effective way to sell down your assets.

Remember, at least here in Australia, your capital gains are lumped on top of your income in the year that you sell the asset. The only exemption to that is selling your primary home, and the only other little rule is that for investments that you hold for longer than 12 months, only half of the capital gain is taxed. So there are many tax considerations that most honestly don't even think about when you buy an ETF, but they'll definitely get you one day.

So anyway, guys, they are my five considerations you may or may not have thought of when it comes to ETFs. I hope that's helped you. Well, ideally, I hope you know that hasn't helped you. I hope, ideally, you were across all those five considerations already. But overall, I hope the video helped you. I hope you enjoyed it, and if you did, of course, leave a like on the video. It really helps out the video in the YouTube algorithm. Subscribe to the channel if you haven't done so already.

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