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Exchange traded funds (ETFs) are one of the most transformative financial innovations of this generation, giving investors a wide range of highly liquid investment strategies at a low cost. An Exchange Traded Fund (ETF) is a diversified collection of assets (like a managed fund) that trades on an exchange (like a share). It blends the benefits of both managed funds and shares and offers investors a simple and cost-effective way to help achieve diversification in their investment portfolios. ETFs can offer exposure to a portfolio of securities representing specific asset classes, sectors, countries or even segments of the bond market.
Whether it’s at the grocery store, the shopping centre or the petrol station, a dollar saved truly is a dollar earned. The same is true when it comes to your investments, where keeping costs low can help you reach your goals sooner. Even small fees can have a big impact on your portfolio because not only is your balance reduced by the fee, you also lose any return you would have earned on the money used to pay the fee.
ETFs typically cost less than comparable managed funds. Buying an ETF can also be more cost effective than buying the same basket of securities individually.
When it comes to owning ETFs, a key element to consider is the Total Expense Ratio (TER), which represents the total cost of holding an ETF for one year. These costs consist primarily of management fees and additional expenses, such as transaction costs and other direct costs which are disclosed annually in the Product Disclosure Statement (PDS).
Most investors would generally agree that the primary goal of investing is to generate the highest possible return for the lowest risk. Diversification can help you obtain this balance. By spreading investments across asset classes, geographies and sectors, investors lower their risks as the poor performance of one investment should be offset by stronger performance in another, and vice versa.
ETFs generally track indexes that are comprised of many individual securities, helping to spread the risk and insulating investors from the impact of price swings in any one security. Although this does not eliminate risk entirely, the diversified structure of ETFs has the potential to improve the risk-adjusted return of your portfolio.
The high liquidity of ETFs – the speed with which they can be bought and sold – comes from the markets on which they are traded. ETFs trade on exchanges and investors can buy or sell throughout the trading day, just like shares.
And just like shares, you can buy and sell ETFs in a variety of ways:
The ease of trading ETFs gives investors more control over when and how they trade. This high-liquidity feature is one of the key benefits of owning ETFs, particularly when compared to managed funds. Just make sure your order type is consistent with your goals.
Knowing exactly what you own is important information you need to make financial decisions. ETFs are straightforward and transparent about their investment objectives. In addition, information on ETFs holdings, performance and costs is published daily and freely available on the product page for each ETF.
While ETFs disclose holdings daily, that only happens monthly or quarterly with managed funds. Because of their longer disclosure cycle and the greater flexibility that active fund managers have when choosing investments, some managed funds have historically been affected by what’s known as “style drift.” Style drift occurs when a fund’s holdings change over time and sometimes stray farther from the fund’s intended strategy than investors may realise. With ETFs, you’ll always be able to know what you own and don’t have to worry about style drift.
By combining the diversification benefits of mutual funds with the ease of share trading, ETFs are able to provide investors with a simple way to access the world’s financial markets. ETFs may make it easier for people to get invested and stay invested.
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