No longer relying on a regular pay cheque can take some getting used to. It pays to have a plan, and learning to manage your nest egg is certainly an education you’ll thank yourself for – now, and as you enjoy your comfortable future. 

Before you start calculating how much money it costs to live longer these days (a lot), it’s worth looking into what you can do to replace or supplement your income once you’re retired. 

You might have already heard about Exchange Traded Funds (ETFs) – either from a financial planner, or in the media. Many financial planners would tell you that establishing a steady income stream is important for effective planning and budgeting. 

ETFs can be attractive for this purpose – because many offer monthly or quarterly distributions across various asset classes such as: 

• cash 
• bonds 
• hybrids, and 
• equities.

ETFs have emerged as one of the most popular investment vehicles worldwide, offering investors cost-effective access to a diversified portfolio. You can trade ETFs as an individual investor, or through your Self-Managed Super Fund (SMSF) if you have one. Some industry super funds and super platforms also allow investors to access ETFs. 

ETFs ensure you can invest in a diverse range of industries without laying out too much capital in any single one. This is what investment managers mean by ‘diversification’. 

Diversifying your portfolio allows you to spread your risk, avoiding putting all your eggs in one basket. If one of your investments doesn’t perform well, others might be able to pick up the slack. ETFs can also deliver a reliably regular income that takes pressure off your retirement planning.

What is an ETF?

An ETF is an open-ended investment fund. ETFs trade on the ASX, similar to shares. 

ETFs can be thought of as a ‘basket’ of assets. If you wanted to gain exposure to the largest companies in Australia, for example, you could go to your broker and buy shares in each company individually, but that’s a lot of work, and a lot of brokerage fees! 

Alternatively, you could purchase an ETF, such as the Betashares Australia 200 ETF (ASX: A200), which would provide exposure to all those companies in a single trade – saving you time and money. 

ETFs generally aim to track the performance of a specific index or asset class, before fees.

Here’s how ETFs operate

When you invest in an ETF, you’re purchasing units in the fund, not the underlying investments themselves.

ETF prices generally track the value of the underlying holdings (called Net Asset Value). By contrast, the price of shares in Listed Investment Companies (LICs) fluctuate based on market demand, and often trade at a premium or discount to the value of the underlying assets (NAV). https://www.betashares.com.au/courses/etf/buying-selling-etfs/

There are two main types of ETFs available:

1. Passively Managed ETFs: These ETFs aim to closely track the performance of an index or commodity (before fees and expenses), such as the S&P/ASX 200 or S&P 500, without trying to outperform the market.
2. Active ETFs: These are actively managed investments where fund managers employ trading strategies to outperform an index. They may carry higher risk than passively managed funds, and generally have higher fees. 

ETFs cover a wide range of asset classes, including Australian and international shares, specific sectors like mining or financials, fixed-income investments such as bonds, and even precious metals.

The advantages of investing in ETFs:

• straightforward to use and understand
• easily bought and sold on the stock exchange
• ETF holdings and performance are regularly disclosed
• typically have lower fees than traditional managed funds
• suitable for use in SMSFs
• cover a broad spectrum of asset classes, diversifying your risk.

The risks of investing in ETFs

All investing involves risk. The primary risks of investing in ETFs stem from the underlying asset classes or strategies they cover. Investors should understand these risks before investing.

You can read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) to get a better understanding of the risks. These are available from the manager’s website.

Understanding Fixed Income ETFs 

Fixed income ETFs invest in bonds, which are essentially loans to governments or large companies. These can offer you attractive income, as well as providing defensive characteristics to your portfolio. 

Fixed income ETFs generally offer income generation at a lower risk than shares. These ETFs typically offer:

• regular and reliable income 
• diversification benefits 
• higher level of capital stability and preservation than shares.

This is why fixed income ETFs can be an attractive option for income-focused retirees.

Remember: Fixed income ETFs can pay regular income (typically monthly), which can be a huge help with your household budgeting if you’re used to receiving a monthly income payment.

Betashares Direct provides access to a comprehensive suite of fixed income ETFs, being the largest provider of cash and fixed income ETF solutions in Australia. This can be a way for you to receive that regular income you’re used to having, even in retirement. 

If you prefer an ETF that’s more dividend-focused, Betashares have those too – and their funds have been winning awards since 2016.