ETFs - June 12th
With the proliferation of self-managed super funds (SMSF) and the gradual return of confidence in the investment market an ever-increasing number of investors are expected to move from the relative safety of cash to a more…– Read more
ETFs - May 16th
Fortune's list of the top 350 most admired companies is out. So just how socially responsible are their top 12 and what should you look for when investing?– Read more
Exchange-traded funds (ETFs) are a form of investment option that trade like direct shares but look like a managed fund. The ETF pools your money with that of other investors to invest in a widely diversified portfolio and return dividends to you. This offers the ability to diversify over an entire sector or market segment – potentially hundreds of companies – with just a single investment in one ETF product.
The sales and purchases within this investment are overseen by a professional fund manager, but it is less expensive in terms of management fees than a managed fund is. This is because ETFs are passively managed by tracking an index such as the ASX 200, whereas managed funds are actively managed and aim to beat the benchmarks of an index.
ETFs are considered by ASIC to be complex financial products. Some types of ETF are more complex and risky than others. For more information on ETFs and risks associated with them, see ASIC’s Moneysmart website at https://www.moneysmart.gov.au/investing/complex-investments/exchange-traded-products
Exchange-traded funds work by tracking the yield and return of indexes such as the NASDAQ-100 Index, S&P 500, and Dow Jones. What this means is that if you, for example, buy into an ETF that tracks the S&P/ASX 200, you are effectively purchasing a small number of shares in each of the top 200 companies traded on the Australian Stock Exchange. An ETF that tracks a particular sector such as the energy index would let you effectively hold a small part of each of the component energy-related companies.
ETF products are listed on the ASX, making them easy to buy and sell through a stockbroker or through your own online trading account. This is a highly liquid type of investment. It is also fairly tax-efficient because you own shares in the ETF rather than directly owning the shares or other assets being traded by the fund.
It is worth noting that there have been several new ETFs launched in recent times which are moving away from an index approach, but they are an exception to the traditional rule.
CANSTAR’s ratings show which ETFs offers outstanding value, across investments in Australian shares, commodities, international shares, and fixed income and cash.
Written by: TJ Ryan
We research many providers of ETFs, which are listed across three broad categories and several sub-categories:
ETFs are ideal for investors looking for a low-cost, low-risk product with broad diversification and a steady return. Those who want to protect their wealth while growing it might appreciate an ETF, as its diversified nature is useful for avoiding the effects of volatility in the market. There are even “bear fund” ETFs that will help you make returns during falling markets.
ETFs are also well suited to those with an SMSF superannuation arrangement.
Before choosing an investment fund, you should know what your risk profile is. There are a variety of different funds to suit investors’ varying levels of risk tolerance. Broadly speaking, there are four common risk profiles:
Your risk profile will largely determine the asset classes you choose to invest in with an ETF, from shares to property, bonds to cash. Different mixes of the assets carry varying levels of investment risk.
You will also need to ask yourself what your stance on ethical or responsible investment is. Are you worried about what companies your ETF invests in on your behalf? Choosing ethical investments is a growing trend, with more investors wanting to make sure their money is not funding activities that go against their personal values. Ethical investment funds can “screen in” companies that actively invest in sustainable activities like healthcare or green energy, and “screen out” companies that invest in world-damaging activities like coal seam gas, tobacco production, slave labour, or forest logging.
Greg has been regularly saving into an account that has accumulated a little over $50,000. He doesn’t need the money in the short-term, so he is interested in trying to achieve higher returns through the stock market.
Greg has just retired so he is naturally fairly averse to risk and wants to find a simple way to invest some of his money in a low-risk environment. He should look for an ETF that does not trade heavily in commodities, emerging markets, or other volatile markets.
Having heard a lot about slave labour and the dreadful working conditions in many factories, Greg wants to make sure he doesn’t end up investing in companies that exploit their workers. He begins looking for an ETF with an ethical investment portfolio.
Using the CANSTAR website, Greg compares ETFs and checks the MER% fees charged on a few ethical investment options before choosing one that offers annual distributions.