Exchange Traded Funds – ETF’s – What are they?

A relatively new investment product available on the ASX is ETF’s.  Investment Managers such as Black Rock, Vanguard and Russell Investments (and many others) set up ETF’s to give investors the ability to diversify across a particular sector of the market at a low cost.  In the past this was usually done through Managed Funds which concentrated on a sector or country or region.  For example there may have been an Asian Fund, a US Fund, a high dividend fund, or a gold fund or a healthcare Fund.  In each case the name told you what sector of the market your investment would be in and – if you wished to diversify across this market sector – you would choose a fund manager and obtain units in that particular fund.  This was generally a more expensive way of investing and you relied on the manager to advise you (usually no more than monthly) what companies in that sector you were invested in.  Redeeming your funds was also more cumbersome and time consuming.

ETF’s by contrast are listed on the Australian Stock Exchange (ASX) and you can buy and sell them as you would with “normal” shares.  The “mix” of each investment is generally available on a regular basis, and the costs paid to the manager are generally less than .7%.

The concept of diversifying into international markets using ETF’s  makes the process simple, and retains liquidity as the decision to buy, sell or hold is made by the investor, and funds are released or required as per normal share trading rules.

Some examples of ETF’s limited to a country or regions are ASX codes IAA, VTS, IEU, IVV and IZZ.  The name generally gives you an idea of the region/country in which the investments will be made. e.g. VTS (Vngd US Total Market CDI) tells you that the manager of this ETF is Vanguard, it is investing in shares on the US Stock Market, and – unlike most ETF’s – the investments are not restricted to a particular part of the market (top 250 stocks, resource stocks, growth stocks,…).  Another example: IAA (iShares Asia 50 ETF CDI) is managed by Black Rock and is aimed at tracking the index of the top 50 shares in particular share markets in Asia (South Korea, Taiwan, Hong Kong, etc.). All this information (including the actual shares invested in – in the case of IAA this currently includes Hyundai, Samsung, etc   – and the percentages of their holdings) is available from various sources online, including the different managers and the ASX.

If you are a small investor or have previously been unable or unwilling to diversify into international investments, you may find EFT’s a good way to start this type of investment.

As always, you should seek as much information as you can and always ask questions until you are sure that ETF’s are right for you.

 

Steve

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