News & Information

What are exchange traded funds?

June 09, 2016

Exchange traded funds (ETF’s) have gained significant traction in Australia in recent years. ETF’s offer investors a cost-effective way to diversify their portfolios without the complexities associated with Managed Funds.

Exchange traded funds are a blend of both Managed Funds and direct shares. Their benefits include the ability to provide broad diversity in a portfolio at low cost combined with liquidity and flexibility. ETF’s, like direct shares, can be bought and sold on the market.

Exchange traded funds follow indices by replicating the stocks held within those indices. For example, the ASX Top 200 is replicated within an Exchange traded Fund. The ETF manager holds the top 200 ASX stocks in proportion within this ETF and allows investors to buy units in that offering.

Some Exchange traded funds can be very broad in their holdings replicating large markets such as the S&P 500. Whilst others can be very narrow in their focus offering limited holdings in specialised areas such as aged care.

The specific benefits of Exchange traded funds include;

Diversification:

An ETF’s can provide instant exposure to a broad market. As already noted, this could be to a broad sector with hundreds of shares or a narrow index with as few as 20 shares

Cost efficient:

ETF’s allow an investor to gain exposure to a broad market without incurring many trade related buy/sell costs.

They are also generally cheaper than actively managed managed funds

Performance:

ETF’s generally replicate performance using tight tracking techniques, deep liquidity and institutional quality indices.

Flexibility:

ETF’s can be traded on the local exchange during normal trading hours. You can trade Exchange traded funds using a broker, via a financial planner or on line yourself through a  trading account.

Transparency:

As with all investments we use at LifeTime Financial Group, we believe transparency is critical. There are two important areas under this heading. What you actually hold within the ETF’s (The stocks you are exposed to) and transparency around costs of operation which should always be disclosed upfront by the provider and the adviser with whom you are working (If you engage a financial planner)

Liquidity:

Because they are traded in the same way as ordinary shares, they are always liquid. This allows us to quickly adapt to changing market conditions.

Tax efficiency:

Finally, Exchange traded funds do not experience the same high turnover of shares that managed funds do. This can make Exchange traded funds more tax efficient than managed funds.

As the market in Exchange traded funds develop, we are seeing the introduction of a significantly broader range of these types of investment, including some exotic funds with highly complex structures.

There are a number of providers of Exchange traded funds in the market. Providers including State Street, Vanguard, Blackrock and Market Vectors are considered the leaders in this quickly developing market.

LifeTime Financial Group has been using ETF’s for many years now. We believe they have a role in everyone’s investment portfolio.