ETFs are created by specialist financial organisations and allow investors to acquire shares in a fund which tracks a market index like the S&P/ASX 200. So instead of buying shares in a company like Telstra (TLS) from an online broker, or a bar of gold from a gold dealer, you can invest in an ETF that will replicate the performance of a particular index or type of asset. ETFs are therefore cost efficient and can offer instant diversification and trading flexibility. You can visit the Moneysmart website for a more detailed description of what ETFs are.
The benefits & risks of Exchange Traded Funds
|
Benefits |
Explanation |
|
Low cost |
ETFs are managed in a controlled way and typically have low management fees and operating expenses. ETFs also have a low minimum investment amount, and therefore provide an affordable way to achieve diversified exposure. |
|
Trading flexibility |
Shares in ETFs can be bought and sold at market price at any time of the trading day. Because they trade like stocks on an exchange, a wide range of techniques (such as stop loss and limit orders) can be used to take advantage of anticipated market movements. |
|
Transparency |
As an ETFs issuer usually provides information to the market on daily basis, investors know precisely which securities the ETFs holds and what they’re invested in, instead of waiting until the end of the quarter to review the fund’s holdings. |
|
Diversification |
One ETF can give exposure to a group of equities, market segments (like the major bank shares, energy and resources companies) or a country or a group of countries (e.g, European, Asian, American and global emerging markets). |
|
Potential tax efficiency |
The structure of an ETF can help to minimise capital gains. The investor decides when to sell an ETF and any capital gains tax is paid at the time of final sale. |
Despite their potential benefits, ETFs also have some risks that must be considered
|
Risks |
Explanation |
|
Market risk |
There is a chance that the market or markets the ETF invests in will decline. |
|
Market pricing |
The market price of an ETF is not the same as the market value of the ETF’s underlying securities. |
|
Exchange rate fluctuations |
ETFs are traded and settled on ASX in Australian dollars. If investing in a foreign ETF that is not protected against currency risk, fluctuations in the exchange rate can affect the value of the portfolio. |
|
Won’t outperform |
ETFs are designed to mirror the performance of market indices. This means that your investment will only track the indices and not outperform them. |
For more information on the benefits and risks of ETFs, visit the ASX website.
ETF strategies
ETFs are popular among self-directed investors like those with self-managed super funds (SMSFs), who have found ways to include them as active investments within their portfolios, especially international share ETFs. They are convenient because they can be bought and sold through your online broker and are also regarded as being cost effective.
It’s important to highlight that buying an ETF can be a rewarding strategy during a bull market or when a market is trending up, when individual investments may be more challenging to choose between because you don’t know which speedboat to jump on. At the same time history has shown that bear markets can be brutal and risky. The good news is that ETFs allow you to exit the market in a timely and clean way that could save you significant wealth.
ENDS
Elio D’Amato is CEO of Lincoln Indicators. Lincoln Indicators is a boutique fund manager, fundamental research house and the creators of Stock Doctor. Lincoln Indicators Pty Ltd ACN 006 715 573 (Lincoln). AFSL 237740. You can find out more at www.lincolnindicators.com.au.
Important: Lincoln Indicators Pty Ltd ACN 006 715 573 (Lincoln). AFSL 237740. This communication may contain general financial product advice. Our advice has been prepared without taking account of your personal circumstances. You should therefore consider its appropriateness, in light of your objectives, financial situation and needs, before acting on it.
This information is current as at 01 May 2015.
Lincoln Indicators Pty Ltd, its director, its employees and/or its associates hold interests in TLS. This position could change at any time without notice.
This article was sponsored by ANZ E*TRADE. The article has been written for information purposes only and has not taken into account your objectives, financial situation or personal circumstances. You should consider whether it is appropriate for you. Before making any investment decision, you should seek independent advice. The opinions in the article are the personal opinions of the author and not of ANZ E*TRADE. To the extent permitted by law, ANZ E*TRADE does not accept any liability or responsibility in connection with the use or reliance on the information in the above article. ETRADE Australia Securities Limited (trading as E*TRADE Australia) (ABN 93 078 174 973, AFSL No.238277) is the provider of the ANZ E*TRADE online investing service. E*TRADE Australia is a subsidiary of Australia and New Zealand Banking Group Limited (ANZ) but is not an authorised deposit-taking institution under the Banking Act. When you become a customer of E*TRADE Australia, it will open an E*TRADE ANZ Cash Investment Account (Cash Account) on your behalf. ANZ is the issuer of the Cash Account. Apart from any deposits in the Cash Account, the obligations of E*TRADE Australia do not represent deposits or other liabilities of ANZ. ANZ does not guarantee the obligations of E*TRADE Australia. © ETRADE Australia Securities Limited 2014.
