Exchange Traded Funds (or ETF’s) have become very popular, particularly over the past 5 years. In fact, the amounts invested in ETF’s has doubled over this time. Last year (2020), Australians invested over $20 billion in ETFs.
It is true that there are some advantages to investing in ETF’s. However, of course, not all ETF’s make good investments and there are some common pitfalls you must be aware of.
What is an ETF?
An ETF is simply a managed fund that is owned in a company structure and that company is listed on the Australian Stock Exchange. The only assets the company holds are the underlying investments. For example, for an ASX200 ETF (such as
A200 or
IOZ), the company would own the top 200 listed stocks proportionally according to their market capitalisation (value).
You can invest in an ETF using an online share brokage account, such as
Commsec.
What are the advantages of ETF’s
Prior to ETF’s, the only way to invest in a managed (or index) fund was directly with the investment manager e.g. Vanguard.
This required you to fill out an application form each time you wanted to make a new investment. The managed fund would charge you a fee each time you invested and/or divested (this is called a buy/sell spread). And some of the lower cost ‘wholesale’ funds were only available to people if they invested a minimum of $500,000.
ETF’s provide a good solution as they allow you to invest in a wholesale managed fund for the cost of a share trade (which can be as low as $10) and no paperwork is required.
ETF’s and LIC’s are different
ETF’s tend to utilise rules-based investment methodologies (commonly referred to as
index funds). These products tend to have two common characteristics. Firstly, they are very low-cost. Investment management fees are typically below 0.40% p.a. (some as low as 0.04% p.a.) Secondly, they tend to be very well diversified. You can find a list of all ETF products
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