Exchange Traded Funds guide: Here’s everything you need to know
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Traditionally, having a diverse portfolio and having simple maintenance requirements was an either/or choice.
That is, unless you could buy into managed funds, but they can’t be easily bought and sold because they are not traded on stock exchanges. Furthermore, many of these are open to high-net worth or institutional investors only.
But Exchange Traded Funds (ETFs) claim to offer range as well as simple management of stocks. They offer retail investors the ability to buy multiple stocks at once while being able to trade as simply as just owning one.
ETFs work similarly to managed funds which invest in various financial assets including shares, bonds, infrastructure and in some cases even other ETFs. Among shares, ETFs can invest in shares of particular countries’ exchanges (such as the NASDAQ), a sector (such as defence) or to track an index (like the ASX 200).
They are managed by portfolio managers from financial institutions which buy and sell stocks on a regular basis. Australia’s biggest ETF providers include BetaShares, VanEck and iShares.
Unlike traditional unlisted funds they can be bought and sold through an exchange.
According to BetaShares, the ETF investor population in Australia in 2019 reached 455,000, which is 18 per cent higher than last year. BetaShares expects this to grow to 521,000 in 2020.
Of the investor population, 43 per cent are millennials, although the average age is 42. While the industry is still skewed 76/24 per cent towards males, this is an improvement from five years ago when it was 89/11 per cent.
Currently 30 per cent of ETF investors hold it through their self-managed super fund, whereas back in 2008 this figure was higher at 51 per cent. More investors are now buying and selling them directly.
There are 150 ETFs on the ASX with funds under management.
ETFs have performed well in 2019. As of December 13, the average ETF on the ASX had gained 22 per cent in 2019 and all but a handful had seen year-to-date growth.
The best performing one was BetaShares Geared US Equity Fund (ASX:GGUS), up 62 per cent.
Following this was Betashares Global Gold Miners (ASX:MNRS), up 40 per cent, which is easy to attribute to the rise of gold prices in 2019 – cracking A$2,000 for the first time.
Here are all the ASX-listed ETFs and their performance in 2019 up to December 13:
Swipe or scroll to reveal the full table. Click headings to sort
According to BetaShares’ most recent ETF report, the most common reasons investors used ETFs were diversification (over 75 per cent), lower cost (64 per cent) and access to overseas markets (57 per cent).
Other reasons noted were liquidity, flexibility and avoiding risk. Many of the reasons fall under three common headers: flexibility, greater exposure, lower costs.
ETFs can also fit in with a variety of investment strategies whether defensive or progressive.
BetaShares CEO Alex Vynokur told Stockhead some may buy ETFs as a defensive strategy, particularly those that invest in corporate bonds.
“Nobody really buys them [bond-focused ETFs] thinking they’ll receive significant returns, they think about the preservation of capital or the negative correlations with equities,” he said.
But only a few months ago, Betashares launched a series of diversified ETFs that offered multiple assets in the one ETF and would suit growth objectives.
The most progressive is the BetaShares Diversified High Growth ETF (ASX:DHHF), which according to the company is 90 per cent growth and 10 per cent defensive.
Beyond that they also allow exposure to assets that are difficult to invest in. One example is US stocks. Betashares has an ETF for that – the NASDAQ 100 ETF (ASX:NDQ).
Betashares also offers exposure to currencies, with no less than five funds that hold physical currency, including a US dollar ETF and a UK pound ETF.
If currency goes up, the fund is designed to go up too. The fund managers hold physical cash in bank accounts. Interest accrues to the benefit of the fund.
Or maybe you want exposure to certain themes like cybersecurity, artificial intelligence or even the rise of India. Again, there are ETFs for all of them.
Another trait of traditional funds is high fees. Hedge funds for example charge management and performance fees – the former is typically a percentage of a fund’s net asset value and ranges from 1 to 4 per cent per annum.
ETFs however charge far lower – the average ETF fee (globally) was 0.26 per cent in May 2019. But US institution Salt Financial went even further and launched an ETF that temporarily gave investors 50c back for every $US1,000 ($1,444) in its fund. In effect, paying them to invest.
But this offer will end in April 2020 and even before then the regular fees apply once you’ve invested over $100m in Salt’s ETF.
As with any financial product, ETFs are not without risks and pitfalls. Many of these stem from misconceptions about ETFs.
It is easy to sit back and relax thinking the portfolio managers will handle everything for you and if the market crashes you can quickly sell out, but this may not be the case.
As with any financial product you should seek advice before making any financial product decisions. But some analysts argue ETFs may be seen as an easy escape from having to do your home work.
Kris Walesby from ETF Securities said at a Bloomberg seminar back in October that investors had to do their research.
“Many read the title of the ETF and get in,” he said. “Many think ‘it’s a US yield fund so I know how it works’. They don’t know what it does.
“When Obama passed regulation easing on Cuba, the ticker with CUBA went up even though it had nothing to do with Cuba.
“People expect simplicity because it’s an ETF, but they’re on a scale of complexity. You do need to do research.”
Also just because they are theoretically liquid (being on a public market), there is no guarantee in practice, especially on dour days.
Wealth Within chief analyst Dale Gillham told Stockhead this is because institutions do not buy ETFs – it is predominantly retail investors.
“In any stock market crash you can always sell the top stocks, on the worst day,” he said. “I can sell whatever I want to and got out and had my money in three days. But nobody can do that with managed funds.”
Gillham also told Stockhead you may be better off just buying individual stocks. He argued any investor who did this would have out-performed any index ETFs particularly because they would not have paid performance fees.
“An ETF cannot beat an index because if they’re investing in an ASX 200 they’re either buying all of the 200 in the weighting, or taking positions using some form of derivative to give a cover of the index,” he said.
“At the end of the day they’re trying to match the market doing and theoretically what its doing, they’re doing. But they’re charging fees.”
Read More about ETFs:
Here’s what BetaShares’ CEO thinks about ETF growth in 2019 and what they look for
Commission-free trading is ramping up but experts warn investors to do the homework
Index-based ETFs don’t actually beat the market and they’re not liquid, analyst says