Building wealth means developing good financial habits like investing regularly in a diversified range of investments and focusing on the long term.

Unless you know the share market well and have enough money to buy a stake in a range of shares, choosing your own shares is not an easy option.

Unit trusts offer you easily accessible, diversified investments, because professional fund managers choose the shares, bonds and listed property investments for you. They try to beat the market, but sometimes fail and sometimes underperform for long periods before delivering good returns again. It is hard to identify the managers who will consistently deliver good returns.

Now you can buy exchange-traded funds or ETFs as you would buy a single share, as they are listed on the JSE.

“ETFs trade like any other normal share on the main board. The difference is, instead of giving you access to the performance of a single company, ETFs give exposure to multiple companies,” Mike Brown, managing director of etfSA, an investment platform for ETFs, says.

ETFs give you easy, low-cost access to the returns a share market can deliver because ETFs track the fortunes of a “basket” of shares through an index, like the index of all the shares on the Johannesburg Stock Exchange or the top 40 largest shares. Some ETFs track “baskets” of bonds or commodities like platinum or palladium.

Funds that track an index are known as passively managed because there are no fund managers actively selecting shares.

In South Africa, most ETFs are classified as unit trusts – or collective investment schemes – so they are regulated by the same regulation as unit trust portfolios.

ETFs are generally classified into six broad categories: domestic equities, international equities, bonds and cash, dividend or income focused, multi-asset and commodities.

Brown says ETFs are worthwhile, long-term investment tools as many active funds fail to outperform market indices. At the end of last year the SPIVA South Africa Scorecard published by Dow Jones, the international index company, stated that 92% of actively managed equity funds had failed to outperform the S&P SA Shareholder Weighted Index over the fives years.

Data from the global research firm also shows that passive investments are enjoying a boom in new investments, growing over 25% in the last decade to over $5 trillion globally at the end of April this year.

The benefits of investing in ETFs according to etfSA include:

• They are well diversified which reduces volatility and risk
• They typically give you exposure to blue-chip (top company) stocks
• ETFs are transparent meaning you always know what is in the index
• You only pay brokerage and JSE charges once and not for the whole portfolio
• You can find ETFs that give you access to either the local or the international market

“You can invest in a single ETF to compliment your portfolio, fine tune your preferred exposure in a particular sector, market or region or build an entire investment portfolio at a lower cost,” Nerina Visser, ETF Strategist at etfSA, says.

Visser does, however, warn that ETFs will be affected by volatility of the market they track and there is potential for large swings in returns depending on the index tracked.

“An ETF that tracks a broad market index such as the S&P 500 is likely to be less volatile than an ETF tracking a specific industry or sector. So it’s important for you to be aware of the fund’s focus and the types of investments it includes,” Visser warns.

Jannie Leach, head of core investments at Nedgroup Investments, says other common mistakes or risks to avoid when you invest in ETFs include not diversifying adequately and making single bets on a market, trying to time the market when it comes to the asset classes in which to invest,trading too frequently and underestimating the impact of costs and taxes on your investment growth.

Since ETFs are listed securities they must be bought through a broker or investment platform. The right ETF should fit your investment goals, risk tolerance and your investment time horizon.

The Satrix 40 ETF won this year's people’s choice ETF award at the South African Listed Tracker Funds Awards – it has returned more than 13% a year over the past 10 years.

On the EasyEquities and SatrixNow platforms you can access this ETF without any minimum amount.

Generally, ETFs are available for a lump sum investment of R1,000 or an ongoing R300 a month but some platforms like SatrixNow and EasyEquities accept less.

etfSA advises that you get your debt paid off and build up on your emergency fund before you invest.

If you haven’t already used your investment limits for a tax-free savings account, you can invest in an ETF in one of these accounts. This way you can ensure you maximise your returns and the wealth you will grow over time.