An ETF, or “Exchange Traded Fund”, is an investment fund that mimics the returns of an asset class like Australian or Global shares. ETF’s first emerged in the US around 1993 and landed on Australian shores in 2001. It was not love at first site for Australian investors, but ETFs popularity have grown very strongly in recent times with Australian investors now holding over $20 billion of funds in ETFs compared to just $4 billion in 2012.
How do I actually buy an ETF?
ETF’s trade on the Australian Stock Exchange and you can buy and sell them through a broker (Commsec, E*trade etc.) like any other listed security.
Were all ETFs created equal?
Within each different type of asset class there are a number of ETFs that can be purchased, for example if you were looking for exposure to Australian equities there are approximately 15 different ETFs constructed to do exactly that. Determining which one of these is best to purchase usually comes down to 2 determining factors:
- Fees – ETFs all charge a Management Expense Ratio (MER) and minimising the MER you are paying is an important part of ETF selection. A small increase in fees can make a big difference to overall investment returns.
- Liquidity – This refers to your ability to easily buy and sell a security. The way to determine liquidity is look at the daily traded volume. Higher traded volume is also good as the spread (difference between buying and selling price) will generally be lower with securities that are traded more.
You will notice that returns are not a good comparison tool for ETFs. This is due to the fact that returns are determined by the underlying securities they are tracking, not the investment skill of the ETF issuer.
Why Plenty recommends ETFs to their clients.
At Plenty we often recommend to our clients to use (the right) ETF’s in their investment portfolio as they provide:
- Cost efficiency – The MER of “best in class” ETFs will be in the range of 0.2% – this compares to the 1-2% you are likely to pay a fund manager. Given fund managers are likely to underperform the market, this savings in fees will make a huge difference to overall returns.
- Diversification – Diversity is a key part of a good portfolio and ETFs are one of the cheapest ways to get that diversity. Having a portfolio of ETFs will provide exposure to a wide variety of securities, industries and asset classes.
- Low entry point – Getting the same broad exposure as an ETF would be almost impossible for the average investor.
- Flexibility – Unlike many other funds, ETFs are traded on the ASX and treated like other stocks. This means pricing and transparency are very good for the investor. You are also able to buy ETFs on margin (i.e borrow money to invest) and sell them short which could make managing risk easier.
How much should I invest in ETFs?
Determining how much to invest in ETFs is a tricky question. It depends on a number of factors relating to your goals, current financial position and your tolerance to risk. Plenty can help determine whether ETFs are right for you and which ETFs you should purchase; it’s free to get your financial plan – get started now.