Exchange Traded Funds (ETFs) (2024)

Summary: ETFsare becoming a popular investment choice for many New Zealanders, with the NZX's Smartshares a long-established provider. ETFs offer the same benefits as index fundswhereby you can invest in a diverse range of companies, industries and regions, all with the convenience of one security. In a nutshell, ETFs offer alow-fee, no-hassle way to invest money all packaged together as something you can buy and sell on the sharemarket. ETFs are, in most cases, a long-term investment.

ETFs are easy to buy and the choices significant, our guide outlines their pros, cons, how (and where) to buy them and must-know tips for investing. We cover:

• ETF Pros and Cons
• Investing in ETFs
• Popular New Zealand and USA-listedETFs
• Other Considerations

Know this first: Exchange Traded Funds (ETFs) explained

1. When aninvestorbuys an ETF, they get a diverse selection of many shares in one bundle. This avoids the need to purchase the shares individually. The ETF directly invests into companies that fall within its investment criteria.
2. As an example, the Smartshares S&P/NZX 50 ETF invests in New Zealand companies listed on the S&P/NZX 50 Index, which are New Zealand's largest fifty companies by market capitalisation.This includes companies such as Fisher & Paykel Healthcare and Spark.
3. ETF investments are (usually) ‘passive’. This means there isn’t a fund manager actively buying and selling shares trying to pick winners, so the costs are much lower. Each ETF follows its investing policy and buys into companies that meet thepre-established criteria. Our Passive Investing vs Active Investing has further details to help explain the differences.
   
4. You can invest in almost anything with ETFs - Would you like to invest in american companies, New Zealand market leaders, global energy companies or dividend-producing blue chip companies? There areETFsfor all of those, and a lot more.
   
5. Many ETFs follow sharemarket indexes, with NZX50, ASX200 andS&P500-focused ETFs listed on the NZX. It is also a widely acceptedfact that, in the long-term, no actively-managedfund or individual share portfolio can outperform an index fund.
6. Long-term is popular - if you’re a long-term investor, i.e. looking to build up savings over five, ten or even twenty years, ETFs can deliver strong returns.

Disclaimer: Our ETFs list, published below, is journalistic in nature and only highlights low-fee options. It does not endorse the ETFs, nor does it constitute financial advice. ETFs are largely growth-focused, investing in New Zealand and/or overseas. The ETFs listed are regarded as long-term investments that carry a varying degree of risk.

​Looking for other ways to invest?Check out our guide to index funds and our Passive Investing vs Active Investing guide.

Pros and Cons of ETFs

ETF Pros:

1. ​Unlike individual shares, ETFs remove the need to research individual companies:Each ETF index buys and sells shares that fit within the ETF's investing strategy (which is never deviated from).
2. Research backs up ETFs:It's well-accepted that investors are, in most instances, better off buying into a market-tracking ETF thanindividual shares, given that markets out-perform the vast majority of individual shares in the long run.
3. The fees are low:ETFs charge as little as 0.03% p.a. in management fees (the US-listed VOOVanguard S&P 500 ETFbeing one example).
4. ETFs offer diversity:There are hundreds of ETFs covering New Zealand and global markets and specific sectors.

ETF Cons:

1. ​No downside protection: When a particularmarketindex sinks, the ETF tracking that index will also sink in value. An ETF, by nature, rides the ups and downs with a focus on long-term returns.
2. No control over holdings:An ETF invests by following a strategy and is unemotional in its decisions, it doesn't respond to market insights. In short, there is no way to influence what shares you'reinvested in as an ETF must follow its mandate.
3. Limited exposure to different investing strategies:Many ETFs follow an index, so if a new company lists on the sharemarket, it's unlikely any ETF will include it until it falls within theinvestment strategy. For example, when a2 Milk listed on the NZX, it was around 33 cents, but it only joined theNZX50when it s value reachedabout 65 cents. However, if you invested in an ETF following the NZX 10, the ETF wouldn't invest into a2 Milk until the share price was around $5. For this reason, there's a lot of upside that is missed out on.
4. Losses can be extended:Suppose a company is performing poorly. In that case, the ETF will continue to hold the shares for that company until they no longer meetthe requirements of the ETF's investing strategy - for example whenthe market capitalisation becomes too small. This means losses can be incurred while other investors sell off their poor-performing investments.
5. You may have to pay brokerage fees to buy and sellETFs - there are some exceptions, but just like buying and selling shares, you'll pay fees.
6. You'll have to wait for a buyerto cash in - unlike index funds, you can't redeem your investment for cash. Instead, it must be sold the sharemarket, and there needs to be a buyer for you to sell. Also, you don't know what the price will be on the day you sell, and if there's a lack of interest in the ETF (or it's not widely traded), you may have to accept a lower price. Our index funds vs ETFs guide has more details.
7. NZ ETFs aren't tax-efficient - Right now, the IRDclassifiesSmartshares's ETFs as a listed PIE. This meanseach distribution (i.e. dividend) received by the ETF is automatically taxed at 28% – the highest PIR rate. If you're on a lower PIR, you'llpaytoo much tax which can only be refunded backthe following May via a tax return. Until this happens, the tax sits as cash and can't be distributed or re-invested meaning there is potentially less capital growth -this issue does not apply to foreign ETFs.

Investing in ETFs

Buying an ETF is, for most people, a lot easier than picking individual shares. Yet it can be hard to know where to start. We believe it's a three-step process, which we outline in detail:

1. Decide where you want your investments based. In New Zealand, Smartshares are the most common option, with 35 to choose from. They are all denominated (i.e. traded and held) in New Zealand Dollars. However, platforms such as Hatch,​Tiger Brokers (NZ) and Stake offer access to US-based ETFs, but the investment will be held in US Dollars.Sharesies offers ETFs in New Zealand, Australia and US markets (in their respective currency). Interactive Brokers offers US-based ETFs and many other ETFs listed on 30+ global exchanges, including the UK, Germany, Canada, Australia, Japan, Hong Kong and Singapore. All investments are held in their functional currency.
   
2. Pick an ETF that you want to invest in. ETFs available track well-known indexes like the NZX 50, ASX 200, S&P 500 or specific industries (with property, emerging markets and industrialsbeingpopular examples).
3. Understand the exchange risk if you invest outside of New Zealand.The NZD moves daily against other currencies, which will affect the value of your investment. For example, if the NZD becomes stronger against the USD, your USD ETF investment will become less valuable in NZD.

Know This: Smartshares,which offer exposure in many countries and industries, can be a popular introduction to ETF investing given all investments are in NZD. Investing platform InvestNow lets anyone buy and sellSmartshareswithout any brokerage fees.

​Step 1. Decide where to buy ETFs - Investment Platforms vs Share Brokers vs Direct

When you’re choosing where to buy an ETF, there are a few things to consider:

1. ETF selection: Do you plan to invest in one index, country, geographic region (i.e. Asia and Europe), company size (i.e. small-cap or multi-national),sector (industrials or ethical etc) or strategy (growth vs income/dividend-producing etc)?
2. Platforms: There are a lot of choices; Smartsharesbenefits from being NZD-based with 35 different ETFs to select from, as well as free buying and selling usingInvestNow. If you're looking for US-based ETFs, and there are hundreds available;​Tiger Brokers (NZ), Interactive Brokers,Hatch,SharesiesandStakeoffer access. If you prefer ETFs beyond the USA and New Zealand,Interactive Brokersoffers hundreds of options. Australian ETFs are available on Sharesies.
3. Access and management: Do you want to have access to research information to help you decide whichETF is right for you? What platform you select depends on how involved you want to be as an investor, and how much research you want to do. Stake,​Tiger Brokers (NZ) andInteractive Brokers all have in-depth charting and research tools.
4. Fees:ETFs have two fees the expense ratio (which are the expenses incurred by the ETF to run itsday-to-day operations) and the brokerage (i.e. trading) fees when you buy and sell ETF holdings. The expense ratiocan range from a super-low 0.03% p.a.to 1% p.a. Brokerage fees are charged by the broker or platform you use to buy and sell the ETFs. This will be a percentage of your trade value (e.g. a traditional brokerage) or a fixed fee (likeStakeand other online investing platforms).
5. Foreign Exchange: If you invest in ETFs outside of Smartshares, you'll need to exchange New Zealand Dollars into a foreign currency, which will be USD if itsStakeorHatch. The fees for doing this differ (1.0% for Stake, 0.50% for Hatch, and if you're investing in ETFs usingSharesies, the currency fee is 0.50%) - our Hatch vs Stake guide has more details. Interactive Brokerscharges 0.020% for transferring NZD into any currency and is the cheapest for this. UnlikeSharesies,HatchorStake, Interactive Brokers requiresa lot more work and regulation when it comes tosigning up.
6. Fees:ETFs have two fees:

• Expense ratio:These are expenses incurred by the ETF to run itsday-to-day operations.Theycan range from a super-low 0.03% p.a.to 1% p.a.
• Brokerage (i.e. trading) fees: These areincurred in when you buy and sell ETF holdings. Brokerage fees are charged by the broker or platform you use to buy and sell the ETFs. This will be a percentage of your trade value.

​Step 2. Pick an ETF to invest in

MoneyHub does not offer or publish financial advice, so the best approach would be for you to do your own research as to what ETF is most appropriate for your needs. Things to consider include:

1. Location: Do you have a preference for what country you invest in? There are plenty of New Zealand ETFs that follow the top 10, 50 or more companies. If you want to invest in the USA, Smartshares offers this too, while keeping everything in NZD.
2. Business sector or industry: The choice is endless, with ETFs that invest in technology, bonds, cash, emerging markets, property and many more. Before investing, consider whether the ETF is based on a widely followed index and/or it tracks popular underlying assets. If it does, it is likely thatETFoffers better investment prospects than an ETF that has an obscuregeographic focus and/or a niche investing strategy.
3. Performance: How has the ETF performed in the last 1, 3 and 5 year period? Are the foundations strong, and what does the market think about the ETF you're interested in?For non-New Zealand ETFs,ETF.com and the EFT Databaseare both useful resources to learn about ETF investing; ETF.com is oursuggested starting point.
4. Level of Assets: To get economies of scale and ensure liquidity, an ETF should have a level of assets above NZ$15m. This means there's enough investor interest in the ETF to let you sell without having to wait a long time for a buyer.
5. Trading Activity:Before investing, make sure the ETF is frequently traded. This isn't so much of an issue withSmartsharesor popular US-based ETFs, but others are less liquid. This is important because the more an ETF is traded, the closer thebid-ask spread which means you'll likely get the best price when you buy and sell.

Step 3: Understand the exchange risk if you invest outside of New Zealand

If you invest in US-listed ETFs, the exchange rate will influence the true value of your investment. This is best explained with an example:

• You invest NZ$1,000 into a S&P500 ETF - the NZD/USD exchange rate is 0.63, meaning your NZD translates to US$630.
• After six months, your US$630 S&P ETF has increased 10% in value to US$703. You decide to sell, and want to convert the money back to NZD.
• At the time you do this, the NZD/USD exchange rate is 0.68. This means your US$703 investment is worth NZ$1,033 (US$703/0.68).
• This means your profit is only NZ$33 because the NZD has risen close to 10% against the USD at the same time the ETF increased.
• However, it must be noted that had the NZD become weaker against the USD if in the previous example, your NZD gains would compound. For example, hadthe NZD/USD rate dropped to 0.58, the US$703 ETF investment would now be worth NZ$1,212. This represents around a 20% gain despite the ETF's market price increasing only by10%.

Our view: Currency movements can significantly influence the value of any foreign holding. If you're unprepared to take this additional risk, some Smartshares ETFs are hedged and protect you against such movements.

Popular ETFs in the US and NZ Sharemarkets

Please note, this list is journalistic in nature and highlights some well-regarded ETFs only - it does not endorse the providers, nor does it constitute financial advice. The ETFs below are listed under the investment platforms you can use to invest and are

.

Our selection of ETFs arelargely growth-focused investing in New Zealand and/or overseas. All the ETFs listed below are seen as long-term investments that carry a varying degree of risk.

Popular ETF options include:

ETFs - Must-Know Facts Before Investing

ETFs are becoming an increasinglypopular investment option for New Zealanders due to their low-cost, diversity and long-term returns. Investing in an ETF is also a lot easier (and less risky) than choosing a number of different shares. To make sure you invest in an appropriate ETF, we suggest making a few additional considerations:

1. Is the ETF performing? Before investing, make sure you understand how the ETF is performing. If it has dropped, has it done that consistently against its benchmark? Given the range of ETFs on offer, you might end upinvesting in an ETF you don't fully understand. A popularapproach isto choose anETF that follows a major index such as the NZX50 or S&P500.
2. Are you new to investing?If so, don't rush. This guide explains the basics to let you navigate and advance towardsyour financial goals.
3. Are ETFs one part of your investing strategy? Our ETFs vs Sharesand ETFs vs Index Funds guides help explain what options might be available to you.
4. Financial Advisers don’t often recommend ETFs, although there are exceptions. Read more about Financial Advisers here.

ETFs - Related Guides