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Should I punt on exchange traded funds?

A friend of mine has said he has invested in an ETF where if the stock market goes up he gains and if it goes down he loses but the best bit is that he does not have to pick the stocks but he still gets the benefit of the dividends. Could you explain this please?

An ETF or exchange traded fund is created by businesses, which actually physically buys the stocks that make up the S&P/ASX 200 index, which has 200 stocks. If the price of a unit in this ETF was say $50 and you invested $10,000 you would have 200 units. If over six months the market rose and dividends were paid the unit price might rise to $55 and so your investment would now be worth $11,000.

The beauty of this ETF is that you don’t have to pick the stocks but you do rely on the market going up. Some experts think the market going up will have some challenges for a while and they think stock picking value stocks could be the better strategy but this requires good picking and good luck.

For a long-term investor, say over three years, the ETF play could be a reasonable way to have exposure to the stock market.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Wednesday, December 01, 2010

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