What are Exchange Traded Funds?
If you’re looking to invest for the first time, an Exchange Traded Fund (ETF) could be a great introduction into the stock market. You might have heard of an index or mutual fund, but what are exchange traded funds? An ETF is a fund or a portfolio of companies listed on the stock market. The fund can be a collection of companies that trade in stocks, bonds or other securities.
When you invest in an ETF, you don’t own a percentage of the company. You own units within the fund and your ETF broker owns the shares or assets. Most ETFs in Australia are passively managed, which means they follow an index such as ASX200, or all ORDS.
Even though exchange traded funds aren’t stocks themselves, you can buy and sell an ETF as though it was a stock. A lot of the time you’ll hear ETFs and Index funds used interchangeably, but they’re not the same thing.
ETFs are very similar to Index funds, with one major difference. While Index funds allow you to buy and sell shares once a day on the stock market, an ETF allows you to buy and sell your shares whenever the stock market is open.
Types of ETF’s
There are several types of ETFs available for your investment.
Bond ETFs
A Bond ETF can be a collection of government bonds, corporate bonds, and municipal (state or local government) bonds.
These ETFs can provide a fixed income and diversify your portfolio. The investment performance of bonds is usually independent of the overall performance of the share market.
Commodity ETFs
Securities like crude oil, natural gas and gold, are sometimes traded through commodity exchange traded funds. Instead of a direct investment in a commodity by buying barrels of oil, an ETF is a much more realistic option.
It’s important to do your research and understand the key players of the market you’re buying into, before investing in a commodity ETF . Commodities can be natural resources, agricultural goods, or precious metals.
Currency ETFs
The foreign exchange market (also known as forex) for currency trading is the largest market in the world. Australian ETFs that trade currency invests in foreign currencies such as the Euro or US dollar. They track the value of the relevant currency and trade in Australian dollars.
The cost of an investment in a currency ETF is often a lot cheaper than buying foreign currency directly.
Best ETF’s in Australia
The Australian Securities Exchange (ASX) is Australia’s primary securities exchange. You can buy and sell units in an ETF through a stockbroker in the same way you might buy and sell shares. You also have to pay brokerage fees with every investment.
How to buy into an ETF in Australia
First, you need a trading account. Most trading accounts have a minimum value for investment. This can be around $500 dollars with some brokers, while others require between $1,000 – $2,000. Consider sticking to the larger online brokers with a solid track record in delivering returns to their investors. Australia’s biggest ETF providers include; Vanguard, State Street, iShares, Blackrock, Van Eck and Betashares. You can find the index that an ETF follows on the ETF provider’s website. Trades are usually finalised two days after you buy or sell the ETF.
Pro tip!
To get an ETF price that trades closer to the Net Asset Value (NAV) daily, wait until the market has been open for 30 minutes before you finalise your investment.
What ETFs have the highest return?
Here are three of the most popular indexes in Australia:
VAS: Vanguard Australian Shares Index ETF
IOZ: iShares, Core S&P/ASX 200 ETF
If you’re more focussed on receiving a high dividend return, these are Australia’s top high return indexes:
VHY: Vanguard Australian Shares High Yield ETF
IHD: iShares S&P/ASX High Yield ETF
RDV: Russell High Dividend Australian Shares ETF
Pros and cons of investing in ETFs
Now you have a better understanding of what an ETF is and how they work, it’s time to weigh up the pros and cons.
| Pros | Cons |
|---|---|
| Diversification ETFs allow you to buy a basket of shares or assets in a single trade.ETFs also allow you to invest in markets or assets that can be difficult or expensive to access. |
Market or sector risk
While ETFs can help you diversify by combining many companies and assets into a single fund, the market or sector the ETF is tracking could fall in value. For example, if the ASX200 falls, your ETF investment will also be impacted. |
| Transparency
ETFs publish the net asset value (NAV) daily on the ASX. This can help you track how the assets in your ETF are performing in the market |
Currency risk
If the ETF invests in foreign assets, the strength of international currency can directly affect your returns. Some ETFs are ‘hedged’ funds which may minimise this risk. |
| Low cost
Most ETFs are passively managed and follow an index which means you avoid paying any active management fees. |
Lack of Liquidity
Some ETF investments include assets which aren’t liquid or have low liquidity. This means they’re not easily converted to cash. |
| Easy to trade
You can buy and sell ETFs during the trading hours of the exchange. |
Impulsive spending
Being able to buy and sell from open to close can lead to impulsive and unplanned trade deals which can hinder your investment long term. |
You can check the value of an ETF by comparing its price on the ASX with the Net Asset Value (NAV) daily. The NAV is the total value of the entity’s assets minus the total value of its liabilities. You can find the NAV of an ETF at the end of each day on the ASX or on your ETF provider’s website.
Read the fine print!
In the PDS you’ll find; fees and costs associated with the brokerage, the risks of investing in the ETF, and what index the ETF follows.
Remember:
If you have specific questions about an ETF you can contact the provider or seek financial advice. You can also check the ETF providers website for any recent market announcements.
Remember, an investment made on the stock market will have benefits and risks so make sure you do your research before parting with any savings.
Ready to grow your wealth and start investing?
We hope this article on managed funds gave you some key insights for your investing journey. If you would like more information on investments, including how to invest in shares, check out our other helpful articles on Oiyo!
Oiyo is a consolidated online resource, we are not financial advisors. We work with a range of industry professionals and compliance check our articles to ensure factual accuracy. However, we do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information and ideas presented in this article relate to your unique circumstances.