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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
Related topics

When you invest in an Active ETF you are investing in a portfolio of many different assets. The Active ETF is actively managed by a portfolio manager and investment team. You will receive distributions of the fund’s net income.

 

Active ETFs are actively managed by a portfolio manager and investment team to generate alpha and outperform a set benchmark. To invest in an Active ETF you will need to buy some units using your broker. You will also pay a management fee which is usually included in the unit price and in return for investing in the Active ETF you will receive distributions of the Active ETF's net income.

 

Investing in an Active ETF means that you will own units in the fund but not the underlying securities or derivatives themselves.

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 Active ETF/EQMF you can achieve a level of diversification that would normally be too difficult to realise investing in each asset individually. Active ETFs/EQMFs also have no minimum investment requirements which makes them more accessible. They benefit investors who prefer an active investing strategy and want their money to outperform the benchmark.  

 

Furthermore, Active ETFs/EQMFs are a way of investing in an actively managed fund without the hassle of the paperwork required by traditional unlisted managed funds. With no waiting times and the ability to choose which price you invest in the fund, Active ETFs/EQMFs make investing more accessible. Investing more money is as simple as purchasing new units. Investments in Active ETFs/EQMFs are more liquid than traditional managed funds making them a more flexible choice.

A traditional unlisted managed fund often has minimum investment requirements that an Active ETF does not have. Managed funds are not listed on the exchange, and thus require much more paperwork to invest in the fund. Active ETFs, on the other hand, can be traded easily through a broker. Active ETFs can be traded like ordinary shares unlike managed funds.

The increased paperwork associated with traditional unlisted managed funds means that you may have to wait before your money gets invested. Active ETFs make investing more accessible by allowing you to invest quickly and hassle free with the help of your broker. This also means that investments in Active ETFs are more liquid than traditional unlisted managed funds.

Nothing, they are different names for the same investment vehicle. They are also sometimes known as listed managed funds, exchange quoted managed funds (EQMFs) or quoted managed funds. 

An Active ETF is a managed fund traded on a stock exchange. They function like managed funds, but traded like shares which can be bought and sold during trading day on the stock exchange. Active ETFs are actively managed by fund managers to generate alpha and outperform relevant benchmarks.

Active ETFs will aim to beat the benchmark using a number of active investing strategies. They operate in a similar way to traditional managed funds but have the benefit of transparent, live intra-day pricing and market making ability which ensures liquidity 

Investors invest in the Active ETF by using a stockbroker as if they were buying a share. Similarly, liquidating the investment follows a similar process to selling a share. This means that your Active ETF can be monitored and reported like any of your other shares.

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

Active ETFs 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.