How to buy ETFs for your kids or grandkids
When it comes to choosing an investment for your kids and grandkids, it is hard to go past exchange traded funds (ETFs). They tick plenty of boxes. ETFs are low-cost and easy to buy and sell through the ASX. For as little as $500, one transaction buys a diversified investment with a share in hundreds or even thousands of companies.
Children have a long-term investment time frame and ETFs are ideal long-term investments, explains head of personal investor at Vanguard, Balaji Gopal. Many of Vanguard's ETFs track a broad-based index such as the ASX 300 or the MSCI World index.
Gopal says ETFs tracking an index are set and forget investments that you buy and leave to accumulate over the years, without having to touch.
"You are not really relying on one or two companies to give you a long-term gain," says Gopal.
Over the long-term markets tend to go upwards, even if there are falls along the way, says Gopal.
The Vanguard Index Chart shows that $10,000 invested in the Australian sharemarket in 1991 was worth $160,498 thirty years later in 2021. That same $10,000 in Australian listed property rose to $118,013 while in US shares it reached $217,6420 in 2021. In contrast, $10,000 put in cash accumulated to only $38,938 over 30 years.
One of the best sorts of ETFs for children is a multi-asset class ETF that invests in a range of investments such as Australian and international shares, bonds, property and cash.
A broad variety of assets in an investment portfolio helps smooth out performance fluctuations over time and is one of the best ways to reduce exposure to market risk.
There are different multi-sector funds to fit various risk appetites from conservative to balanced to growth and high growth. Multi-sector funds are often called an all-in-one investment solution because you don't have to buy separate asset classes and mix them together.
Gopal says ETFs are tax efficient because they typically have low turnover. This means more money stays in the fund, rather than being paid out in tax. Gopal says Vanguard diversified funds typically hold onto their shares, rather than buying and selling like active share managers and this helps minimise capital gains.
Capital gains is a tax incurred by the investor as a result of selling securities. If parents or grandparents have a higher than usual marginal tax rate, the more they stand to benefit from a fund's tax efficiency.
Before ETFs appeared on the ASX 20 years ago, grandparents and parents typically bought individual shares or opened a cash savings account for their kids and grandkids. But cash rates are rock bottom and individual company shares can be risky if the share price of the company dives.
ETFs were the biggest ever disruptor to the asset management industry when they were launched in Australia 20 years. They were typically much cheaper than managed funds and tracked a broad-based index.
Over time investors caught on to ETFs and they are now a mainstay investment and often form the backbone of an investor's portfolio. There are more than 220 different ETFs on the ASX with assets of over $110 billion.
For busy parents and grandparents, multi-asset ETFs offer automatic rebalancing.
When the share allocation in the ETF goes down in value, the ETF will be buying shares to maintain its asset allocation. When shares go up in value, the ETF will be selling. It happens automatically so you don't have to worry about buying in when prices are low.
Investors value the ETFs' transparency too. ETFs are much easier to research than managed funds and you can see exactly what you are investing in. Also with a broad-based index ETF you don't have to worry about who is managing your ETF, and if they leave the company.
Parents and grandparents can buy and sell ETFs on the Australian sharemarket through a broker. A discount online broker is the cheapest way to buy and sell ETFs and charge around $9 per transaction.
ETFs do not have any sales commissions but an annual expense ratio that is much lower than those charged by managed funds. Investors are benefiting from intense competition between ETF providers that has seen Vanguard drop its annual fee 0.10% on its Australian Shares ETF known as the VAS.
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