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Buying the new iPhone for Christmas? How about the new PlayStation 5 for your kids, or a Netflix subscription for the year? If you had invested the cost of these presents in ETFs five years ago, what would be the value of your Christmas gift today?
A “gift that keeps on giving” might be a worn-out phrase, but recent research showed around four in five Australians (81%) think about how long a gift will last when they choose it1.
The same survey also showed that most Australians prefer the convenience and usefulness of cash over tangible gifts, and as a result, cash and gift cards are Australia’s latest go-to gifts2.
So why not gift an investment portfolio for Christmas instead?
Investments can be not only a long-lasting gift that have the potential to increase in value over time, but also a way to kickstart investing for your grandchildren, your own children – or even yourself.
Exchange-traded funds (ETFs) are a low-cost and simple way to access financial markets for the opportunity to grow wealth over the long term.
What are ETFs?
An ETF is a managed investment fund which can be bought and sold on the ASX just like shares.
You can use ETFs to gain exposure to a range of asset classes, including shares, fixed income and commodities, both in Australia and internationally. An equity ETF, for example, pools money from investors and uses the proceeds to buy a portfolio of shares in a range of companies.
Most ETFs are ‘passive’ index funds. This means the ETF aims to track the performance of a market or a relevant benchmark index, for example an Australian sharemarket index such as the S&P/ASX 200, or a U.S. sharemarket index such as the S&P 500 or the Nasdaq-100.
A key benefit of the passive investing approach is that investors are generally subject to lower management fees, avoiding the expensive fees that are usually incurred when an investment manager ‘actively’ manages the portfolio by picking individual stocks.
ETFs are also a way to achieve instant diversification for your investment portfolio, because you gain exposure to a portfolio of shares in a single trade. Contrast this with ‘stock picking’, where you invest in individual shares you think will outperform – a task that is challenging for even the most experienced investors. ETFs enable access to entire sharemarkets, sectors or geographic regions in one trade.
How much does the average Aussie spend at Christmas?
According to the earlier-mentioned research report by the Financial Planning Association of Australia (FPA), Australians with young families spend an average of $117 on a significant Christmas gift.
However, the highly anticipated release of the latest iPhone 12 and new generation gaming consoles from PlayStation and Xbox may well mean that these high-value gadgets are on many Christmas wishlists this year.
Buy the company instead of the product or service
Let’s take a look at the returns you could have made from an investment in a BetaShares fund focused on technology-related companies, assuming you had instead invested the costs of some of the latest tech-related products or services themselves.
Bear in mind the below is a hypothetical example provided for illustrative purposes only.
What if you had spent the costs of the new iPhone or a yearly subscription to Netflix on an investment in a fund that invests in the companies that provide those products or services?
Apple and Netflix are currently among the top holdings within the portfolio of the BetaShares NASDAQ 100 ETF (ASX: NDQ), which aims to track the performance of the Nasdaq-100 Index (net of fees and expenses). The index includes many other companies that are also at the forefront of the new economy, such as Amazon, Facebook, Google and more.
If you had invested the current cost of a new iPhone 12 ($1,349) five years ago in NDQ, your total return would have been $3,334.42 as at 30 October 2020.
Alternatively, if you had invested the current cost of the top-tier yearly Netflix subscription at a total of $240 each year (at Christmas) over the five years to 30 October 2020 in NDQ, your total return would have been $2,133.60* (as at 30 October 2020).
|Amount spent||Christmas gift||ETF||Average annual return for 3-year period to 30 October 2020||Average annual return for 5-year period to 30 October 2020|
|$240 per year||Netflix subscription||NDQ||As above||As above|
*Example figure calculated based on the 5-year average annual return of 19.84% each year
Past performance is not an indicator of future performance. Hypothetical example provided for illustrative purposes only. Not a recommendation to make an investment decision or adopt an investment strategy.
Shopping for sustainable investments
Australians are also increasingly interested in ‘sustainable’ shopping, according to recent research from ING3.
More than half (57%) of the 1079 surveyed said they wanted to give sustainable gifts, nearly a quarter (23%) said they preferred receiving a socially-conscious or eco-friendly gift, and almost one in two (41%) agreed poorly-chosen gifts contributed significantly to “the problem of waste during the festive season”.
Why not consider a sustainable investment as a Christmas gift?
The BetaShares Global Sustainability Leaders ETF (ASX: ETHI) is an example of an ethical investment which could prove to be a gift of long-lasting, sustainable value.
ETHI offers exposure to a portfolio of large global stocks identified as ‘Climate Leaders’, which have passed screens to exclude companies with direct or significant exposure to fossil fuels or engaged in activities deemed inconsistent with responsible investment considerations, such as tobacco, junk food or gambling.
Based on average spend data from the FPA report referred to above, a young family with three children could spend a total of $351 if they bought a significant gift for each of their three children. If this money had been invested each year (at Christmas) over the five years to 30 October 2020 in the companies in ETHI’s index (based on index constituents as at 30 October 2020), the total return would have been $2,682.26**.
|Amount spent||Average annual index return for 3-year period to 30 October 2020||Average annual index return for 5-year period to 30 October 2020|
|$117 average spend per significant gift for young families||19.97%||14.49%|
**Example figure calculated based on the 5 year average annual return of 14.49% each year
Hypothetical example provided for illustrative purposes only. Not a recommendation to make an investment decision or adopt an investment strategy. Past performance is not an indicator of future performance of any index or ETF. You cannot invest directly in an index. Based on returns of the index that ETHI aims to track, being the Nasdaq Future Global Sustainability Leaders Index, and not ETHI. Doesn’t take into account ETHI’s management costs of 0.59% p.a. or other fund fees and costs. ETHI’s inception date was 5 January 2017.
The key to making compounding in investments work for you is time. Is it now time to change up the way you think about Christmas gifts?
The gift of an investment provides long-lasting value that can continue to increase over time, and it’s never been simpler to get an investment portfolio started. Investing in an ETF can give you instant exposure to a diversified portfolio of shares.
With most Australians preferring the convenience and usefulness of receiving cash over tangible gifts anyway, why not consider putting that cash into ETFs instead?
Investing involves risk. The value of an investment and income distributions can go down as well as up. Before making an investment decision you should consider the relevant Product Disclosure Statement (available at www.betashares.com.au) and your particular circumstances, including your tolerance for risk, and obtain financial advice. An investment in any BetaShares Fund should only be considered as a component of a broader portfolio.
3. According to ING research as cited in https://thenewdaily.com.au/finance/consumer/2019/11/18/changing-christmas-shopping/