I like to spread my wealth between different investments. I don't like putting all my eggs in one basket. So I own property, pensions, bonds, cash and company shares. This isn't about speculation, completely the opposite.
This post covers my use of Exchange Traded Funds to buy a stake in lots of different companies.
ETF's (Exchange Traded Funds) provide an easy way to invest in multiple companies around the world with a single purchase of ETF shares. An ETF is an investment fund, bought and sold like individual company shares. But each share of an ETF is a composite of shares in real companies. This is also known as an Equity ETF's.
I've been buying Vanguard ETF's. Vanguard is one of America's biggest investment companies. They manage over a trillion dollars of investors money in their mutual and ETF funds.
So, for example, yesterday I bought £1,000 of the Vanguard FTSE Developed World ETF. This is listed on the UK stock exchange with the ticker VEVE.
VEVE is a simple Index Fund. When I buy a share in VEVE, I am buying a share of the biggest companies listed on the worlds major stock exchanges. Many of them are household names you would have heard of: Apple, Microsoft, Exxon Mobil, Johnson & Johnson, JPMorgan Chase, Amazon, General Electric, Wells Fargo and many more.
These companies cover many sectors of the world's economic activity including banking, mining, retail, technology, oil & gas, cleaning products .... pretty much everything we all use.
The total number of companies VEVE covers is over 2,000. Yes, one share of VEVE has bought me a tiny share of the 2,000 biggest companies in the world. I am spreading my investment risk over 2,000 companies, otherwise known as diversification.
Owning VEVE shares also entitles me to receive a small share of the dividends from those 2,000 companies. Every quarter I will receive a small amount of dividend revenue. As the dividends build up, I will use them to buy more VEVE shares.
If I assume that the value of a VEVE share grows by 4% a year and the average dividend is paying 3%. I am receiving 7% per year. If I hold it for 11 years, and re-invest my dividends, my initial investment of £1,000 will grow to £2,000. The current savings rates in a cash savings account would take about 50 years to double my money.
Yes, there is a risk of a global economic depression which would lower the value of these 2,000 companies and my VEVE shares. But there is a much bigger risk that inflation will eat away at a £1,000 of cash in a bank account.
Another benefit of owning an ETF share is that I can sell it whenever I like. If I need cash, I can convert my VEVE shares into cash within a minute during the trading day. An ETF is a very flexible investment tool. Compare that to say a pension, which you have wait years before you can cash in.
There are thousands of different types of ETF's sold by different investment firms. Another reason I chose a Vanguard ETF is because their transactions costs are some of the lowest in the investment world.
Because I'm in the UK, I also used another investment trick available to us Brits. I bought the VEVE shares inside a Self Select ISA. The gains made on shares inside an ISA allow me to keep any gains TAX FREE. Outside of an ISA, I would have to pay 20% Capital Gains Tax when I sold the shares. We are limited by how much we can invest in an ISA each year. Currently that limit is just over £15k a year.
So in summary, an ETF is one of the easiest ways to invest in a diversified range of companies within your own and other countries. But I am careful which ETF's I buy. Some of them, particularly commodity and leveraged ETF's have been volatile in the past. The large Indexed ETF's are considered the safest.
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