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This article appeared in the November 2011 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.

More good books are available as the exchange traded funds market grows.

Photo of Janene Murdoch By Janene Murdoch, Educated Investor

I first took an interest in exchange-traded funds (commonly known as ETFs) after watching a program called Barefoot Investor presented by Scott Pape. The topic was brought up in a discussion with a 20-something young man wanting to maximise his savings as well as get his money working for him. As I have a 20-something son, also a good saver, I decided to do my own research on ETFs. Scott Pape had recommended the ASX-listed ETF over the S&P ASX 200 index. What better place to start!

(Editor's note: To learn more about the features, benefits and risks of ETFs, do the ASX online ETF course. It has seven modules covering the fundamentals of what ETFs are and how to buy and sell them. Subsequent modules take a detailed look at particular types of ETFs, including a case study.)

My next challenge was to find other information on ETFs and books seemed the logical place to begin. Although the ETF market is popular in the US, in Australia it is relatively small but growing and the amount of financial literature available reflected this. I was delighted to find an Australian book on the subject, a current publication aptly titled Exchange Traded Funds, by author Scott Goold.

After losing a substantial amount of money some years ago because of poor decisions, Goold decided that ETFs were the market of his choice. The book is written from a trader's point of view, as a call to action in the battle to protect his capital while putting it to work for him.

Know what you are buying

There are numerous benefits with ETFs, from lower fees and transaction costs, excellent liquidity and potentially superior returns compared to some active managed funds (after fees). ETFs give access to a selection of companies within an entire index or sector, with the potential to earn income from dividends, but most importantly the ability to trade with a stop-loss (a predetermine point at which you sell), therefore limiting risk.

There is a lot of information on the ASX website regarding ETFs and I would recommend that if you are considering using ETFs, you make time to read it.

The number of books on ETFs has been growing recently. There is Exchange Traded Funds for Dummies, Investing With Exchange-Traded Funds Made Easy and the more targeted Three Paths to Profitable Investing, focusing on ETFs covering healthcare, infrastructure and the environment. Scott Goold's book covers most of this information in a very readable format.

One particular attraction is the opportunity that ETFs give investors who want exposure to the popular minerals and mining companies but who are a little reluctant to invest in them directly. You can invest in ETFs that offer diversified exposure resource companies in the ASX 200 and ASX 300 indices.

Much is made of investing in foreign exchange since the Australian dollar has been so high. ETFs over currencies give investors access to foreign exchange without having to trade direct. (Editor's note: Betashares offers ETFs over the US dollar, British Pound, and Euro).

About the author

Janene Murdoch runs the Educated Investor bookshop, a leading specialist financial bookshop.

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