One of the fastest growing sectors of the Australian share market is the Exchange Traded Funds (ETFs). ETFs are investment vehicles that provide exposure to a basket of shares, listed property, commodities or currencies.
ETF’s are primarily passive investments that are similar to managed funds in that they are open-ended (i.e. they can create more units as demand requires) but have the advantage of greater transparency and liquidity through trading on the stock exchange.
ETFs also have an advantage over Listed Investment Companies (LICs) in that they can be bought and sold for close to the value of the underlying asset (i.e. index) and do not suffer the discount/premium that sometimes occur in LIC share prices.
If the ETF’s underlying assets (i.e. a basket of shares) produces income regular income distributions are made to investors. Like managed funds, ETFs pass on this income untaxed and franking credits can also be passed through. Management Expense Ratios (MERs) are also very low ranging from as little as 0.09% to 1.1% for some actively managed offerings.
Given the strong growth in ETFs, the range of funds on offer has now become very wide and the sector’s + $10 billion in total asset value. A snapshot of the types of ETFs on offer includes:
Investment strategies using ETFs:
ETF’s allow you to access investment opportunities that may not be easily accessed and/or are not cost efficient such as international shares (particularly region or theme specific), currencies and commodities. This will expand your asset allocation by increasing diversification outside of Australian shares.
- Gain diversification across sectors in a cost-efficient manner.
- Invest small amounts in a broadly diversified basket ETF as a low cost way to get exposure to the Australian share market.
- Transition funds into the market without having to pick individual company exposure.
- Exposure to foreign currency. With the expectation of a falling AUD/USD, some market commentators forecast the AUD to fall to $0.66, investors can utilise international ETF’s to profit from this view.
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The information in this article is general advice and takes no consideration of any specific person’s investment objectives, financial situation or needs. The views expressed herein are solely the views of Morgans Financial Limited ABN 49 010 669 726 AFSL 235410.