What is an ETF?

What is an ETF?
 
At Stockspot we believe Exchange Traded Funds (ETFs) are the building blocks for the best investment portfolios.

ETFs have been around for roughly 20 years and are fast becoming the most popular investment option. Each year more money leaves managed funds and goes into ETFs. This is because they can easily be traded on the stock exchange, they’re low cost and offer instant diversification.
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Why you shouldn’t rush into tech stocks

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It’s easy to get swept up in the hype of a hot sector, but there are big dangers when the music stops.

Investing in the hot stock or sector de jour is a always strong temptation, especially in markets where there are very clear winners and losers. These days global technology is that hot sector – particularly the big US tech giants. They’ve all doubled, tripled or quadrupled since 2012 so have easily beaten the broad market. Their returns have trounced Telstra, BHP and Woolworths.
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Active vs Index investing – what’s the difference?

Active vs Index investing
 
Active investing and index (or passive) investing are 2 different ways to grow your wealth.

Actively managed funds aim to beat the returns of a given investment market. Passively managed funds, on the other hand, are designed to mimic the returns of a specific market as measured by a particular index like, for instance, the S&P/ASX 300. This is why they are also known as ‘index’ funds.

Most of the money in Australia is managed by active funds but passive investing has been growing fast, particularly since 2008. We look at some of the key differences and why index investing has been growing in popularity.
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How are ETFs taxed?

How are ETFs taxed?
 
ETFs: Everything you need to know about tax on ETF investments in Australia.

One of the reasons exchange-traded funds (ETFs) have gained popularity with Australian investors is because they are tax efficient. If you’ve invested in ETFs on your own, through a broker, or with the help of an automated investment service like Stockspot, here are some tax issues to consider.

Keep in mind that this article is general information only and doesn’t consider any individual’s personal circumstances.
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How to build an awesome investment portfolio

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Clients sometimes ask us how we built the Stockspot portfolios, and why we selected 5 assets to invest in rather than 2, 3 or 10!

It comes down to the purpose of the Stockspot portfolios which is to maximise returns for each level of risk. Five assets allows us to give clients the best possible combination of returns, risk and costs.

To do this we leverage the benefits of diversification. Diversification simply means that by combining investments with different characteristics you can improve the quality of returns in your portfolio.

Quality of returns is measured by how much risk you need to take to earn a certain return. Since all investing involves taking some risk, the aim is to minimise the risk you need to take to earn the return you want. Diversification across assets enables you to take less risk to earn better returns.
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When is a good time to invest?

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Markets can go up and down over the short-term and it’s almost impossible to pick the market top or bottom (even for professionals).

So when is a good time to invest in shares?

Instead of trying to time your entry point, dollar-cost averaging is a strategy to invest gradually over a few days, weeks or months. This helps reduce the impact of short term moves in the market because you invest at an ‘average’ price over a period of time.

Dollar cost averaging can help smooth your initial investment returns by reducing the risk that you’ve invested everything just before a dip in the market. By buying over a period of time you get to take advantage of any market dips and buy at the lower prices if markets fall.
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How does anchoring bias affect your investing?

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In many walks of life we have a tendency to use anchors or reference points to make decisions, and sometimes these lead us astray. Nowhere is this more dangerous than when investing.

What is anchoring?

Anchoring is our tendency to grab hold of irrelevant and often subliminal information in the face of uncertainty to make decisions.

Since anchoring occurs in so many situations, no single theory has conclusively explained why we do it. However the modern favourite theory for explaining the effect of anchoring comes from several groundbreaking studies that were conducted in the fields of decision science and performed by Kahneman and Tversky in the 1970s.

Kahneman and Tversky were interested in how people formed judgements when they were unsure of the facts. They found that when people are uncertain about the correct answer, we take a guess using the most recent number we’ve heard as a starting point.
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What is your risk profile & how does it help your investment strategy?

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Having an up-to-date investment profile is important when making any investment decision because it helps match you to the best investment strategy to meet your goals.

Your investment profile defines what type of investor you are and is made up of 2 parts:

  1. Your investment timeframe

  2. Your risk profile

Asking questions about these 2 areas helps to ensure that your investment strategy is suitable and that you don’t take on too much risk.
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The ETF boom continues in 2016

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The ETF boom has continued in Australia with the market growing 20% over the year to $21.3 billion in funds under management (FUM).

ETF trends for 2015/16

Global share ETFs maintained their position as the largest ETF sector, with $7.9 billion, up 18% for the year and there were 13 global ETFs launched.

Fixed income and cash ETFs continued to grow in popularity as investors looked to diversify and access higher yields than the low interest rates available in savings accounts. The sectors’ FUM grew 40% to $2.2 billion.
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Stockspot portfolios: 2 years on…

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Thanks to the thousands of clients who have been on the journey with us since Stockspot launched to the public in May 2014, exactly 2 years ago. Back in 2014, automated investing, robo advice and fintech weren’t as well understood as they are today so we appreciate the support of our clients who have trusted us to help manage their savings.

Despite the recent share market volatility, the Stockspot model portfolios generated 4% to 4.5% p.a. in total returns over the 2 years to 30th April 2016.

The performance was more than double the 1.5% p.a. return from indexed Australian shares over the same period. Distributions and dividends made up most of the performance since it was a subdued period for capital returns.

Stockspot model portfolios: 2 year performance after fees

  Total return p.a. Distributions p.a.
Topaz 4.13% 3.36%
Emerald 3.99% 3.33%
Turquoise 4.20% 3.07%
Sapphire 4.34% 2.78%
Amethyst 4.56% 2.52%

Total return after ETF and management fees (1st May 2014 – 30th April 2016)

2-year-portfolio-performance
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Property or shares? What is the best investment?

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What is the best investment? Property and shares are the 2 most common ways of building wealth in Australia outside of superannuation.

The topic of whether to invest in property, shares (or both) often leads to heated debate. The 67% of Australians who own the house they live in are usually passionate about they believe is their best investment decision.

Shares and real estate have both generated reliable income and capital returns for Australians over the long-term.

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Source: Corelogic, Housing Market and Economic Update March 2016
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The Paradox of Skill: Why active funds underperform

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The latest data for active funds returns does not bode well for traditional active fund managers. Standard & Poor’s (S&P) SPIVA report for 2015 is the clearest indictment yet for traditional active management, revealing that close to 90% of fund managers have underperformed over 10 years after fees.

More recently, 2015 proved to be one of the worst years on record for active managers, who failed to cushion the effects of the stock market’s dip over the second half of the year.

Those who mention top-performing managers as evidence that indexing isn’t sensible are doing retail investors a terrible disservice. Although each year some active fund managers beat the indices, very few have consistently done so over the long term. Those who do well over 1 and 3 years usually do poorly over longer periods as their styles and the market factors that have served them well (value, growth etc) mean-revert.
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Lessons I learned from The Big Short

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There have been a few books and documentaries that have tried to capture the Global Financial Crisis but probably none more entertaining than The Big Short. For those who haven’t read (or seen) it, The Big Short is the story of a few eccentric traders who anticipated the US housing bubble and worked out a way to profit from it.

The book was written by Michael Lewis who you may recognise from some other top-sellers like Moneyball and The Blind Side. Before those two, he also wrote ‘Liar’s Poker’ in 1989 which was a semi-autobiographical memoir about his time on the bond trading floors of the late 1980s. Fittingly, The Big Short continues where Liar’s poker left off – at the peak of the US housing bubble which owes much of its existence to the junk-bond days of the 80s.
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Why bonds belong in your portfolio

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As part of our detailed series on each of the assets in the Stockspot portfolios, we’ve already taken a look at two of our portfolio investments – Australian shares and gold. Now we looked at why fixed interest, also known as bonds, forms an integral part of our portfolios.

What are bonds?

A bond is a piece of debt sold to investors usually by a company or the government. Bondholders “lend” money to the bond issuer for an agreed period (until “maturity”) and in return for that, they are paid a regular income in the form of interest.

Investors in bonds can earn a return in 2 ways:

  • From the income received through the bond interest payments.

  • By selling the bond. If you hold a bond to maturity, you will get face value of the bond back, which is usually $100. However it is possible get more (or less) back by selling a bond before it matures. This is because bonds, like shares, trade on a secondary market and their prices are always changing.

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Should you buy into smart beta ETFs?

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Smart beta is latest investment trend, marketed as a new way to diversify and reduce risk. But is smart beta really the best way to achieve your investment goals? Here we look at smart beta ETFs in Australia – what they are, how they are built and how they’ve performed.

It’s nearly impossible to read the financial news or an investment newsletter these days without coming across the term “smart beta”.

Smart beta – also known as strategic beta, alternative beta, fundamental beta, advanced beta, enhanced beta, and probably a few other names – aims to combine elements of passive index investing and active fund management to deliver the best of both worlds: transparency, broad diversification, and market-beating returns – all at low cost. What more could you ask for?

But before you throw all of your savings into the latest smart beta product, it’s worth digging a bit deeper into what smart beta really is.

Smart beta is all about index construction which refers to which stocks (or other assets) make up an index and their relative size within that index…

So what exactly is an index?
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Investment traps you can avoid

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As the saying goes “experience is the name we give our mistakes”. Too often though, investment lessons come with a large price tag and cause financial distress for individuals and families when they are made with vital savings.

Many common mistakes can be avoided by having a basic appreciation of risk, return, the importance of time in the market and understanding some of the behavioural biases likely to get in the way of smart investment decisions.
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Is your Super in a Fat Cat Fund?

Stockspot has been actively campaigning to raise awareness of poor fund performance since 2013 when we published our first report into 496 of Australia’s largest managed funds, finding that 45% of returns were paid away in fees between 2008-2013.

Our Fat Cat Funds Report aims to shine a spotlight on those funds that are amongst the worst performers and recognise funds that have performed well. This year’s report compared over 3,000 funds including retail and industry super funds.

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Do women make better investors?

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Search the internet for “World’s most successful investors” and you’ll quickly notice a clear trend – very few women mentioned. But a growing body of research has found that women are in fact better suited to becoming successful long-term investors than men.

In 2013, a study found that hedge funds run by women returned 9.8% compared to 6.1% by men that year. A different US study of 750,000 portfolios in 2014 also found women earned higher median returns than men.

Plenty of stereotypes are used to explain this trend of superior performance by women – from men’s testosterone clouding their judgement to women being more calm under pressure. To get to the bottom of this, we looked at our data to work out why women and men really invest their money differently and how this could lead to different results.
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What not to do when markets fall (or rise)

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A question we often get from our clients is ‘Should I move to a lower-risk portfolio or go to cash when markets fall?’. Not surprisingly, questions around switching portfolios and sitting on the sidelines come up most often when markets have fallen or risen fast.

Our gut instinct naturally makes us want to increase our risk tolerance when markets are up and decrease it when markets are down. But like most things when investing, the right thing to do is probably counter-intuitive.

There are certainly some good reasons to update your risk profile but there are also bad reasons to change your portfolio risk that you should be careful to avoid.
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Our favourite ETFs – Australian shares

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Our Stockspot portfolios invest in low-fee Exchange Traded Funds (ETFs) across various assets and we are constantly reviewing the investment choices to ensure that our clients have access to the best possible return and diversification opportunities.

Over the coming months, we will be looking in detail across each of the 5 different broad asset classes we currently invest in, discussing why we’ve chosen the ETFs for our portfolios and looking at some of the other options. We start off with a look at Australian shares ETFs.
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The dangers of dividends

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Three of the most common questions we get about the Stockspot portfolios are "Why does Stockspot invest in gold?", "Can I access more international shares?" and "Can I focus my portfolio on high-dividend shares?".

Having discussed the first 2 questions in earlier posts, we wanted to address the third question on dividends.

The dividend theme has become increasingly popular over the past few years and we’ve noticed a growing number of investors seem to be solely focused on dividend yield without considering total return. This has been partly fuelled by the media and product issuers who have promoted high-dividend strategies as a way to cope with historically low interest rates. However, such strategies come with their own set of risks that are often ignored.
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How gold helps your portfolio

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Of all the investments in the Stockspot portfolios, gold consistently evokes the most passionate responses from our clients.

Views on gold as an investment polarise people but tend be more a matter of philosophy rather than fact. Since gold is a difficult asset to value, market commentators love to speculate what is causing the daily movements in the gold price. As a result of the fixation by most people on short-term moves, little discussion seems to go into the value of owning gold as part of a long-term portfolio.

The purpose of this article is not to discuss what factors are currently influencing the price of gold but to explain why we recommend clients own some gold in their portfolios. There are some good reasons – but first, what makes gold such an emotional topic?
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Better investing on autopilot

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Almost 6 million Australians own direct shares or Exchange Traded Funds (ETFs). As a result, one of the questions we often get is “How does Stockspot compare to managing my own investments?”.

Certainly the trend over the last 10 years has been towards more people investing themselves. The latest ASX Share Ownership Study highlighted that direct ownership of shares and ETFs has rocketed over the past decade while interest in managed funds and professional advice has fallen. This is understandable given the high costs and below-average results that many professional funds have delivered over that time. Also as information and tools have become more easily accessible online, a larger number of people are taking an interest in investing themselves.

So why use a service like Stockspot rather than manage your own portfolio? While it might not be right for everyone, there are a few ways most people can benefit from an automated investment service like ours rather than managing their own investments.
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Why Aussie shares are unloved

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The latest investor study by the Australian Securities Exchange (ASX) has found that share ownership has plummeted over the past decade as Australians have instead opted for property and bank deposits as savings vehicles.

The number of people who own shares has fallen from 8.0 million in 2004 to 6.5 million in 2014, a 20% drop over 10 years. However, despite the fall in popularity, shares remain the best-performing investment over the long-term and 2.5 million Australians would invest in shares if they knew how.
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