So you want to invest in shares, but you don’t want the hassle of a broker or the bother of checking prices daily in case your portfolio needs attention.
Exchanged Traded Funds – or ETFs as they are more popularly known, might be the perfect solution as they are a convenient and low cost way of accessing diverse markets.
Perhaps you’d like exposure to the US sharemarket, but think it’s all too hard and can’t work out the tax implications. You’ve read about the emergence and growth of the so-called “BRIC” economics of Brazil, India and China, and wonder how you might share in that through your investments. Or you’d like exposure to gold, or agricultural commodities.
ETFs are a relatively new type of asset listed on the Australian Securities Exchange. They give investors access to a wide range of global assets by replicating their performance in a tradable security. Australia, after all, represents only around 2 per cent of the capitalisation of global sharemarkets. ETFs open up a whole world of investments, and make them available to a local investor.
For many SMSF investors, ETFs are more attractive – being cheaper and more liquid – than investing in an international share fund, for example. And the last few years has seen strong growth in their popularity.
Where a fund manager may charge 1.5 per cent for their services, accessing an ETF can cost around one-third of that.
The first ETF was launched on the ASX just over 10 years ago by State Street Global Advisors. Other providers include Russell, Vanguard, BlackRock’s range of iShares and ETF Securities.
In the last few years, the number of ASX-listed ETF’s has increased to around 50, and the market capitalisation of the funds surged to over $10 billion.
Scott Bennett, portfolio manager at Russell Investments, says ETFs “tick all the boxes ”: they play a role in balancing the portfolio, offer risk management, and also deliver tax benefits.
“ETFs offer a simple, flexible and low cost means of gaining instant access to a diversified portfolio of securities,” says Bennett. “Not only can ETFs give investors exposure to Australian shares, but to other asset classes such as bonds, international equities and commodities, as well as particular outcome-driven strategies.
“For example, a strategy-based ETF like the Russell High Dividend Australian Shares ETF – or RDV – enables investors to maximise opportunities in the market, through identifying better quality and high dividend-paying companies, while at the same time offers the potential for capital growth.”
ETFs can offer exposure to gold, silver and platinum. One factor to consider, however, is the currency impact. Even though an ASX listed ETF may give you exposure to a basket of shares listed on the US sharemarket, or in Europe, the ETF is valued in Australian dollars. As the currency goes up and down, that is one thing to consider.
The popularity of ETFs is having an impact on managed funds, where apart from performance, the fees are higher. For investors, this means greater diversity of choice and pressure on fund managers to perform, and justify their fees.