Blair Hannon, ETF Specialist, BlackRock - Knowing your manager, knowing the exposure you're investing in, knowing the structure and the risks associated, knowing the trading liquidity of ETFs and the total cost of ownership. These are the five steps of an ETF due diligence process.
So, knowing your manager is really important. And the best way to do that is utilise what's called tracking difference. Tracking difference is the difference between the index on the underlines, so ASX 200, S&P 500, and what the ETF is giving you. For example, if the ASX 200 is up 5% one year, and the ETF only gives you 4%, that's a 1% tracking difference. That's available on every provider's website, so you can always check that out.
Exposure is probably the most important step when you're thinking about the due diligence process because it's going to give you the outcome you're looking for. Whether that outcome is part of your overall investment plan or part of your goal, it may be a broad ETF with, say, 6,000 stocks or a very narrow one with, say, 50, they're gonna drive different outcomes. So, it's very important that you understand, as an investor, what those ETFs look like and how that's gonna help your outcome.
Structure: there's two types of structures, and one is called physically-backed, and one is called synthetic. Physically-backed means that, as an ETF provider, you go out and buy all the securities and hold them on behalf of the investor. There is less risk associated with that compared to synthetic, which is used derivatives and does come with increased risks. As long as you understand those risks, then, you may be comfortable investing those. But just note that there is increased risks.
When we think about liquidity - these are exchange-traded funds. So, you need to buy them on an exchange, whether that's the ASX or through the US Exchange, New York Stock Exchange. As long as those exchanges are open, you can buy the ETF. What we would say, though, as a golden rule around trading, is that you want to always look to place a limit order when you buy an ETF. Don't utilise market orders.
Cost is, obviously, imperative. We, as an ETF provider and any other ETF provider, are trying to deliver you a low-cost, transparent experience when you're buying an ETF, but note that does impact performance. There's also other costs associated, like brokerage when you're buying through a broker. Just note that this is part of the overall total cost.