ETFs - low cost diversification
Combining the diversification of a managed fund with the convenience of a direct share investment, exchange traded funds (ETFs) offer the best of both worlds
Buy the market with a single trade
ETFs are an easy way to diversify across a broad range of assets. Most ETFs track a market index, allowing you to access the performance of an entire market in a single trade. And with ETFs now available for Australian and international shares, property, fixed interest, cash, and more, you can combine multiple ETFs to create your own precisely adjusted asset mix.
Because most ETFs track an index, their investment decisions can be automated, without the need for highly paid human managers. For investors, that means lower management expense ratios (MERs). For example, a broad-based ETF tracking the US S&P 500 typically charges around 0.07% pa in fees, compared to 1%-3% for an actively managed fund.
ETFs can be bought and sold on the ASX like shares. Each ETF has its own market maker - a large financial institution responsible for ensuring there is a matching buyer for each seller, making it easy to access your money whenever you're ready.
You can buy and sell ETFs through the broker of your choice, at the same low brokerage rates as a normal share trade. ETF prices are transparent, instantly available and set by the market. In contrast, investors in a traditional unlisted managed fund can only buy and sell through the issuing fund manager, with the price set by that manager once a day.
What is an ETF?
ETFs are investment funds listed and traded on a stock exchange, such as the ASX.
Since the first ETF was created around 20 years ago, they have become enormously popular with investors worldwide. As of July 2014, there were 1375 ETFs in the US alone, with total assets of US$1.8 trillion, held by an estimated 5.7 million US households.1
ETFs have proven increasingly popular in Australia too. In the year to September 2014, the Australian ETF and exchange traded commodities sector grew 51.6% to $11.71 billion, with 93 different products to choose from.
How it works
Most ETFs are index funds, tracking the performance of a benchmark index, such as the ASX 200. By investing in the assets that make up the index, in the same proportions as the index itself, they deliver returns that generally move in step with their benchmarks.
They may also sometimes use derivatives and other sophisticated investment techniques to more closely match the index performance while keeping costs low.
While the first ETFs tracked broad sharemarket indexes, they are now available for a wide range of different assets and markets, from bonds and property, to emerging markets and global shares.
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