Answering the internet's most common ETF questions

What is an ETF?

How do you compare ETFs? 

Ally Selby: There are hundreds of ETFs available on the ASX. How do investors compare them?

Ally Selby: How would you compare similar ETFs though?

Are ETFs safer than stocks? 

Ally Selby: Okay. I really like this next question. Adam, are ETFs safer than stocks?

The no is that they're all in shares. So no matter where you go, if markets are falling, your ETF will fall as well. And especially with a lot of these thematic ETFs, so in other words, if it's in copper or uranium, all of those kinds of things, if that sector does badly, the ETF will do badly as well. So I don't know if I answered that, but there you go. Yes, they are safe. Yes.

Adam Dawes: Bonds. Yep, absolutely. But most of them are all in that listed space. But, you're right, there are other ones with bonds and things like that.

Are there any downsides to investing in ETFs? 

Andrew Wielandt: Ally, that's a tough question to ask an ETF whisperer, as I've been called previously.

Andrew Wielandt: Thank you. Merchandise coming soon for those playing at home. I think you've just got to be careful of these thematic ETFs, and Adam just touched on a couple of them before. The uranium ETF has just shot the lights out over the last 12 months. It's up about 55%. But over the last month or so, it's down about 9%. So these thematic ETFs tend to have a bit of a life of their own, and when people love them, they're on fire. But when people don't like them, people dislike them with a passion. So I think it's really just making sure you have that balanced portfolio and saying, if I have a thematic ETF, at what point, if people are no longer engaged with that ETF, do I get out? So that's probably more in that active space.

Adam Dawes: A great way for a young person to get started is to get some ETFs instead of trying to pick single stocks and understand what's going on, so you get that basket. So really it comes down to how much brokerage you're paying compared to that. And there's obviously cheap brokerage these days, so everyone should be putting $200 to $300 a month in. And for a young person over a 30-year lifespan, that compounding is amazing. Plus, then reinvesting those dividends as well, I think that's absolutely fantastic. So I don't think there's a real minimum as such. Maximum, the sky's the limit with market makers in there. But on the minimum side, I think for younger people, it's a great way to get your portfolio started.

How long should I hold an ETF? 

Andrew Wielandt: Ally, how long is a piece of string? So again, this active versus passive frame. If I'm a passive investor, arguably forever, as I'm just buying a market or an asset class. It comes down to your circumstances. But if I'm in thematic land - again, coming back to that uranium example from before. Uranium spot prices have come off 10% over the last month. So it's time for me to get out. So if you have more passive, then it's longer term. If you're in thematic land, look at what's driving that thematic. For example, if the lithium price is off 80%, that's probably not helpful for lithium or battery technology ETFs, then you maybe need to have a shorter timeframe.

What happens if an ETF shuts down? 

Adam Dawes: There are lots of ETFs that get released every year. Lots of big companies are releasing all of these ETFs, plus managed funds do that as well. More to the point, I think, is why do they cancel them? They cancel them because there's not enough volume going through and it does cost them money each month/year to have these ETFs listed on the ASX or anywhere. So it has to be a business decision, but it also has to be - like the thematic, it has to be right. So they do cancel these regularly. What happens is that you get the net asset value as of the date they're going to close it. So let's say June 30, you'll get the net asset value, the NAV of that ETF, you get that cash back, and then you can go ahead and do what you want. Whether you're at a loss or a profit, they will close it, give you your money back and you're done.

How are ETFs taxed? 

Andrew Wielandt: I'm not an accountant, that's my disclaimer, but if you think about shares, it's pretty simple. You get a dividend and if and when you choose to sell them, there's either a capital gain or a capital loss. It's pretty simple. Similarly, with ETFs, if I sell them at a gain or a loss, that's one side of it. When it looks at the income though, different components are occurring within the income. So you were talking before about international - there might be some international income in there or if there's some Australian income or there'll be some franking credits, or if throughout the year the fund has actually been changing the mix within there, there might be a distribution of capital.

Adam Dawes: I am going to steal a bit of Andrew's thunder here, but it's the VanEck MSCI International Quality ETF (ASX: QUAL). This is the quality ETF. It is a fantastic ETF and gives you great international exposure. If you have a look at the chart, this thing's done absolutely fantastic and will continue to do amazing going forward. So it's one of our core staple ETFs in every client's portfolio, and I think everybody else should do the same.

Ally Selby: Andrew, over to you.

To be a little bit different, so we're not matchy-matchy, the Vaneck MSCI International Quality (Hedged) ETF (ASX: QHAL) would be another one to think about. That's the hedge version. So one of the reasons why QUAL has done so well is because it's unhedged, and the Aussie dollar, which over the last 40 years has sat at around 74 US cents, is about 65-66 US cents at the moment. So, if and when the dollar does get its act back into gear and you'd expect that to be the case at some stage, then QHAL might be a way to protect yourself. Because if the dollar starts going up, QUAL will come under pressure. So perhaps the barbell, Adam, might be a little bit of QHAL and a little bit of QUAL, but the two together are a match made in heaven.

Ally Selby: Okay, well, I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content just like this every single week.