It’s time to determine which ETFs to buy now that you have your brokerage account. Whether you’re looking for the best ETFs we’ve listed below or want to look for others on your own, there are a few options.
Are ETFs suitable for novice investors?
Because of their many advantages, such as low expense ratios, ample liquidity, a wide range of investment options, diversification, and a low investment threshold, exchange traded funds (ETFs) are perfect for new investors. ETFs are also ideal vehicles for a variety of trading and investment strategies employed by beginner traders and investors because of these characteristics. The seven finest ETF trading methods for novices, in no particular order, are listed below.
How can I go about purchasing an ETF directly?
Because you can’t just go to the store and buy a basket of ETFs, you’ll need to open a brokerage account first. However, before determining where to open your account, think about your objectives. Certain types of accounts are better suited to specific objectives.
- Taxable: These are “normal” accounts that do not offer any tax benefits. This makes them excellent for achieving goals before reaching the federal retirement age of 59 1/2. When you sell your investments, there are no restrictions or penalties, but you must be cautious of taxes. You’ll owe them whenever you make a profit on an investment or receive dividend payments.
- Traditional IRAs and Roth IRAs are tax-advantaged retirement accounts that allow your investments to grow tax-deferredor even tax-free in the case of Roth IRAs. As a result, they’re effective tools for saving for retirement. The IRS, however, imposes particular contribution limits and withdrawal criteria for IRAs as a result of these tax benefits. You can’t contribute more than $6,000 every year ($7,000 if you’re 50 or older), and you can’t access your IRA assets until you’re 59 1/2 without incurring a 10% penaltyplus taxes on any money that hasn’t been taxed previously.
- 529: A 529 account is a wonderful place to start if you want to use ETFs to save for college: Money invested in a 529 plan grows tax-free and isn’t taxed when it’s withdrawn if it’s utilized for approved school costs. 529 plans can now be utilized for pre-college expenses such as private school tuition and trade school fees. While funds maintained in 529 accounts cannot be withdrawn for non-education expenses without incurring a penalty, they can be transferred to another relative without penalty.
- Custodial: If you want a more limited means to save on behalf of a child, custodial brokerage accounts are a good option. You can invest and manage money on behalf of a child beneficiary using these investment accounts. Custodial accounts have no tax advantages, except that up to $2,000 of investment income is taxed at the child’s reduced rate, and money can be spent much more broadly than 529s. A 529 plan’s funds can be used for any purpose that benefits the child. However, once the minor reaches the age of majority (typically 18 to 25 years old, depending on where you live), they will have complete control over the account.
In South Africa, how do I purchase an ETF?
How do you obtain it?
- Open a brokerage account with an ETF provider. You can acquire ETFs with a monthly debit order or a single lump sum investment in this method.
- Use a platform that allows investors to buy ETFs from a variety of issuers.
How do I purchase ETFs in Malaysia?
If you’ve already begun investing in an ETF and are wondering if you may buy one from a different country, the answer is yes.
Investing in companies listed in other countries can be advantageous for a variety of reasons. Diversification of assets or currencies is an excellent concept.
Use Foreign Broker
Create a trading account in the country where the stocks are produced. Open a trading account in the United States to buy shares on the New York Stock Exchange, for example (NYSE). You can cut your transaction fees to a bare minimum this way.
Use Local Broker with Foreign Stocks Trading
Purchase international shares by opening a worldwide trading account in Malaysia with one of the local investment banks or security businesses. Although theoretically, your money is invested elsewhere, the location of your assets will be considered local.
Are dividends paid on ETFs?
Dividends on exchange-traded funds (ETFs). Qualified and non-qualified dividends are the two types of dividends paid to ETF participants. If you own shares of an exchange-traded fund (ETF), you may get dividends as a payout. Depending on the ETF, these may be paid monthly or at a different interval.
Are exchange-traded funds (ETFs) safer than stocks?
The gap between a stock and an ETF is comparable to that between a can of soup and an entire supermarket. When you buy a stock, you’re putting your money into a particular firm, such as Apple. When a firm does well, the stock price rises, and the value of your investment rises as well. When is it going to go down? Yipes! When you purchase an ETF (Exchange-Traded Fund), you are purchasing a collection of different stocks (or bonds, etc.). But, more importantly, an ETF is similar to investing in the entire market rather than picking specific “winners” and “losers.”
ETFs, which are the cornerstone of the successful passive investment method, have a few advantages. One advantage is that they can be bought and sold like stocks. Another advantage is that they are less risky than purchasing individual equities. It’s possible that one company’s fortunes can deteriorate, but it’s less likely that the worth of a group of companies will be as variable. It’s much safer to invest in a portfolio of several different types of ETFs, as you’ll still be investing in other areas of the market if one part of the market falls. ETFs also have lower fees than mutual funds and other actively traded products.
Is it possible to lose money in an ETF?
ETFs, for the most part, do exactly what they’re supposed to do: they happily track their indexes and trade near their net asset value. However, if something in the ETF fails, prices can spiral out of control.
It’s not always the ETF’s fault. The Egyptian Stock Exchange was shut down for several weeks during the Arab Spring. The only diversified, publicly traded option to guess on where the Egyptian market would open after things calmed down was through the Market Vectors Egypt ETF (EGPT). Western investors were very positive during the closure, bidding the ETF up considerably from where the market was prior to the revolution. When Egypt reopened, however, the market was essentially flat, and the ETF’s value plunged. Investors were burned, but it wasn’t the ETF’s responsibility.
We’ve seen this happen with ETNs and commodity ETFs when the product has stopped issuing new shares for various reasons. These funds can trade at huge premiums, and if you acquire one at a significant premium, you should expect to lose money when you sell it.
ETFs, on the whole, do what they say they’re going to do, and they do it well. However, to claim that there are no dangers is to deny reality. Make sure you finish your homework.
In South Africa, how are ETFs taxed?
According to Kelin Pottier, product development specialist at 10X Investments, two investments may provide comparable returns, but the realised after-tax returns can appear drastically different.
Understanding the tax implications of your investment selections is critical to structuring them in the most tax-efficient manner. Investment returns are reduced by taxes in the same manner that expenses and fees are reduced by costs and fees.
Few individuals truly comprehend the taxes they pay, and even fewer question the allowances and incentives that can significantly affect their bottom line which is why, as an investor, you should be aware of these taxes, according to Pottier.
Most people are familiar with income tax, which is known in South Africa as Pay As You Earn (PAYE). This is computed on a sliding basis, with the higher your income, the higher your tax bracket, and the larger the amount of tax you pay.
Your marginal tax rate, which is the rate of tax you pay for every additional rand of income you receive, is determined by the tax band you fall into.
The first R23,800 you make in interest income is tax-free (the exemption increases to R34,500 for people aged 65 and older).
Any interest income you get, whether from a savings account, a stokvel, or a government bond, is added to your overall taxable income and taxed at your marginal tax rate. Rental income and REIT payouts are in the same boat.
Dividends, which are a portion of a company’s profits paid to its shareholders, are taxed at a flat rate of 20%. When a corporation distributes a dividend to its shareholders, it withholds the Dividends Withholding Tax (DWT) and pays it to the South African Revenue Service (SARS) on their behalf.
If a firm declares a R10 per share dividend, it will pay R2 in tax to SARS on each share, and investors will receive the remaining R8 in their brokerage account.
A capital gain occurs when you sell an investment in a collective investment plan (ETF or unit trust) for more than you paid for it. The first R40,000 is tax-free, while the remaining R40,000 is subject to Capital Gains Tax (CGT).
Capital gains are taxed at your marginal tax rate and are included in your total taxable income at a 40% inclusion rate. A 40% inclusion rate means that only 40% of the profit is taxed, rather than the full 100%.
Only when you sell an investment do you have to pay capital gains tax. You don’t have to pay CGT if you don’t sell. You must pay CGT on the percentage of your investment that you sell.
Sindi, for example, makes R33,000 each month (R396,000 a year). Her marginal income tax rate is 31%. She invests R100 in five shares of a JSE Top 40 ETF (total R500).
The market is on a tear, and the ETF’s shares are now worth R200 each. Sindi decides to sell three ETF shares for R600 each, resulting in a profit (capital gain) on those three shares.
Sindi will benefit R300 if she sells her ETF shares today (R600 from the sale minus a cost of R300). The R300 profit is included at the 40% inclusion rate in her taxable income (R300 x 40% = R120). The R120 is taxed at Sindi’s 31% rate, resulting in an R37.20 tax bill.
Although South Africans can lower their tax liability and increase their investment returns by investing in tax-efficient products such as retirement plans, there are few options to avoid paying your tax bill.
Contributions to a retirement fund are tax deductible, and interest, dividends, and capital gains made on investments in a retirement product are tax-free.
Consider Sindi and Samantha, who both make R400,000 per year and pay a marginal tax rate of 31%. Sindi contributes R3,000 each month to her retirement annuity, for a total of R36,000 per year. Samantha does not have a retirement account.
Sindi lowered her taxable income by R36,000 and saved R11,160 in tax by contributing to a retirement product. Individuals are eligible for tax reduction on the lesser of 27.5 percent of their earnings or R350,000 in earnings.
Investors can compound the tax benefits over time by effectively “reinvesting” their tax savings and earning compound growth on these savings by not paying tax on the growth of investments within a retirement plan.
Saving for retirement is encouraged for a reason: the more we can support ourselves in our later years, the less load we place on the state and/or other members of society, such as family and friends of the unprepared. One of the most powerful weapons accessible to South Africans is tax incentives on retirement savings.
Paying taxes is a social obligation, and being tax-efficient is a responsibility you owe to yourself and your family. A rand saved in tax is a rand earned.
The material presented here is intended to be generic in nature. It is not intended to be used as financial, tax, legal, investment, or other advice, and it is not intended to be used as such.