Exchange Traded Funds (ETFs)

An ETF is an investment fund that is traded on a stock exchange, similar to how shares are traded on a stock exchange. It is a portfolio of stocks usually tracking an index. ETFs are passive, aiming to replicate the performance of an index of a specific asset class. This means that if the index goes up then the ETF will go up, conversely if the index falls the ETF will also follow it down.

 

ETFs are usually focussed on one particular asset such as domestic Australian share, international shares, fixed income products, foreign currencies, property and infrastructure, precious metals and commodifies. Passive ETFs will follow the benchmark index up or down, replicating the performance of the benchmark as closely as possible.

 

ETFs can be synthetic or physical. A physical ETF will hold the actual stocks – the underlying securities – from their chosen benchmark in the portfolio. The manager will adjust the portfolio weightings (how much of each stock is in the portfolio in comparison to the others) to align with the benchmark to replicate the performance of the actual benchmark as much as possible. Synthetic ETFs are different in that instead of owning the underlying securities, managers will use derivatives e.g. swaps to follow the performance of the index. As a result, Synthetic ETFs face counterparty risk although steps are taken to ensure it is minimised. Despite this, Synthetic ETFs tend to reward investors for taking on additional risk by charging lower costs.

 

ETFs are often used to diversify a portfolio as they are an easy option to gain exposure in certain asset classes that may be more difficult to gain entry to e.g. international shares which would normally require the services of a specialised broker. ETFs usually have lower fees as passive investing strategies rely less on the skill and experience of the managers than active investing strategies. This makes them a cost effective way to diversify your portfolio and gain access to markets that traditionally tend to be more difficult to invest in.

Passive and active investments are two different investment approaches. Put simply, passive investment involves tracking an index or benchmark (i.e. the ASX200) and replicating its returns and yield. These investments are generally simple and inexpensive –they sometimes get called “set and forget” strategies. If a fund manager has an active investment strategy, they use their skill and knowledge to ‘beat’ the market and earn excess returns for their clients. Although active investing may sound simple – its incredibly complex and hard to achieve, and can be relatively expensive.

They provide access to a range of asset classes and investment strategies that non-institutional investors may not ordinarily have access to, for example international equities, fixed income securities and currency markets. By investing in an ETF you can achieve a level of diversification that would normally be too difficult to realise investing in each asset individually. ETFs also have no minimum investment requirements which makes them more accessible.

ETFs usually have lower fees as passive investing strategies rely less on the skill and experience of the managers than active investing strategies. This makes them a cost effective way to diversify your portfolio and gain access to markets that traditionally tend to be more difficult to invest in.

 

EQMFs are similar to actively managed ETFs. Instead of using a passive investment strategy mimicking an index or other benchmark, EQMFs have a fund manager who makes active decisions about what to invest in. EQMFs aim to beat the benchmark or index whereas ETFs aim to follow the benchmark or index as closely as possible. Whilst EQMFs will try to avoid falls in the benchmark, ETFs will go down when their benchmarks fall. As a result of an active investing strategy, EQMFs will have higher fees to pay for the skill and experience of the fund manager. 

EQMFs and ETFs share similarities in that they are both listed on the exchange and investments in them are made through purchasing units via a broker.

• Accessibility: You can purchase or redeem units in an ETF at any time during market hours in the same way as you would for any ordinary share. This means no additional paperwork or unnecessary delays like with unlisted managed funds. ETFs also have no minimum investment
• Transparency: Unlike a traditional actively managed fund that discloses its holdings at varying intervals, ETFs are highly transparent. Most ETFs are required to publish a list of their holdings on a daily basis.
• Cost effectiveness: As ETFs are generally designed to track a specific index or other rules-based methodologies, fees are (on average) lower than a traditional actively managed fund.
• Liquidity: Given their open-ended structure, an ETF can be as liquid as its underlying constituents.
• Diversification: ETFs are an easy way to achieve a high level of diversification that retail investors are unlikely to achieve by themselves

• ETFs allow diversification of portfolio through a single investment.
• ETFs generally looks to replicate the returns of a specific index/benchmark. 
• Each ETF is allocated an ASX code and lists on the Australian Securities Exchange as one entity. 
• ETFs have continuous pricing, and are traded and settled like ordinary shares.
• No minimum investment requirements

You can invest in an ETF the same way you invest in an ordinary share, through your preferred broker. Live, continuous pricing means that you can choose what price you invest in the ETF.

• Different ETFs have different fees
• Check the historical returns, whilst not an indicator of future performance, it can be useful to see how the fund has performed in the past
• Check what index the fund is tracking
• There are brokerage costs involved with investing in ETFs