What is an ETF (Exchange Traded Fund) and why would you consider using ETFs in your investment portfolio?
What is an ETF?
An exchange-traded fund (ETF) is an investment fund that tracks a specified basket of underlying investments or index and is bought and sold on the Australian Stock Exchange (ASX)
[could also be called an Exchange Traded Index Fund].
ETF’s are pooled funds, usually based on an index, that can be bought and sold on the ASX.
So as opposed to you buying individual company shares directly from the ASX you buy an ETF instead:
CHART: Exchange Traded Fund (ETF) Structure
What Do ETFs Invest In?
From the Exchange Traded Fund provider’s website we can see that buying STW would provide the following exposure per share:
So instead of buying 200 different shares in different proportions and attempting to rebalance them every other day, you can simply buy the entire index using an ETF.
Who Provides ETF’s in Australia?
Most ETF’s provide an exposure over a particular market index.
The reason why ETF’s are usually indexes is because indexes are easy to value and track and therefore less risk for the ETF issuer and investors.
The main ETF issuers in Australia are as follows:
- State Street
Useful Information (ETFs)
Here are some useful links for investing in ETFs:
Why Should You Use an ETF?
ETF’s have been increasing in popularity for two main reasons:
1. First they are low cost when compared with their main competitors managed fund.
For example, the price of Vanguard’s US Total Market ETF is 0.05%, which compares favorably with managed funds offering the same exposure where the fee is usually over 1% (some 20 times more expensive).
2. Second, index funds tend to perform better than actively managed funds.
Standard & Poors (the company that develops and tracks global investment indexes such as the S&P / ASX 200 index) regularly reviews the performance of managed funds to the benchmark index.
S&P SPIVA Research:
Over the years, the S&P research has shown that the majority of managed funds can’t beat their benchmark index.
For example, in Australia in the 5 years to 30 June 2016 only 3 out of every 10 managed funds (69.18%) beat their benchmark.
Read why Warren Buffett prefers index funds to actively managed funds below…
Where Can I Find a List of ETFs?
A full list of the ETF’s available on the Australian Stock Exchange (ASX), can be found HERE
How Can I Incorporate ETF’s into my Portfolio?
It is now possible to build a solid portfolio using a combination of ETFs alone.
In fact robo-advisers such as Acorns and Stockspot only use Exchange Traded Funds to build their investment portfolios.
What’s more, new ETF’s are coming to the ASX every month. It is now possible to invest in currencies, commodities and various international markets that were once only available to the very largest institutional investors.
Here are two ways you can incorporate ETF’s into your portfolio.
1. First, if you currently hold a managed fund, look to see if there is a similar ETF available and then consider replacing switching to the ETF. As we have explained, chances are the ETF will save you heaps in investment fees and also provide a better overall return.
2. Second, if you have spare cash look through the available ETFs and see if there are any sectors or themes you would like to gain access to. In many cases you may find that you can replace a number of your direct shareholdings, with ETFs which will not only reduce single stock risk, but will also cut your brokerage charges as you will have to rebalance your less often (compared to direct share holdings).
- ETF stands for Exchange Traded Fund
- ETF’s are usually provided over market indexes and themes
- ETF’s provide an easy way to gain exposure to indexes and themes for a very low cost
- Warren Buffett recommends index funds (which you can access via ETFs)
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you with this.