Young people priced out of the housing market for now are choosing other ways to build their wealth.
In Australia, it has been suggested that those who have given up on home ownership could instead put their money into exchange-traded funds (ETFs), as an alternative to leaving it in the bank.
An ETF is an investment product that investors buy units in.
One of the most popular in New Zealand is Smartshares’ NZ Top 50, made up of the 50 largest financial products on the NZX Main Board.
Unlike a managed fund, in which a manager can strategically add or drop investments to offer a better return, an ETF is designed to simply track a market index. This means fees are usually much lower.
Units in the funds are bought and sold on exchanges in the same was as shares.
A spokeswoman for NZX, which offers ETFs in New Zealand via Smartshares, said there was evidence in this country that the funds were being used by people wanting to build a nest egg.
She said more than 50 per cent of Smartshares’ monthly applications were from people who did not have an existing CSN – the number that people are assigned when they first start investing in the sharemarket.
From 2015 to 2016, the amount of external money invested through Smartshares’ ETFs increased more than 10 per cent. For this year, it was up 22.6 per cent at the end of June compared to the same time in 2016.
About 80 per cent of Smartshares investors signed up for a regular savings plan. People can contribute from $50 a month to build up their investments over time.
Dean Anderson, Smartshares product manager, said there had been a big surge in the number of people signing up for ETFs.
He said many seemed to be in the “accumulation” phase of their lives. “They are trying to save, for a future investment or a house. It’s a very efficient vehicle to do that.”
It was a low-cost way to get exposure to capital markets and bond markets, he said. People can start investing in ETFs with $500 – whereas some managed funds required $10,000 or more.
ETFs also provide much more diversification than people can achieve by directly investing in shares.
Anderson said some people were surprised at how much their investment could grow. “What a lot of people struggle with is they think linearly, a few hundred dollars a month won’t add up to much. But they don’t consider the compounding effect.”
Anderson said many of the new investors seemed to be millennials. “When you are paying off your student loan that can be $500 or $600 out of your pay cheque each month. As soon as that finishes, you should be saving at that rate rather than spending it.”
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