Some functionality will be unavailable due to scheduled maintenance from 06:00 until 12:00 Sunday 25 February 2024. We apologise for any inconvenience caused.
Google Chrome and Microsoft Edge are in the process of rolling out a version update which is impacting some nabtrade functionality, including buy/sell buttons and certain page loads. If you are a Chrome or Edge user and are experiencing these problems, please visit the following FAQ to review the steps that need to be taken to prevent this issue from occurring.
Forget the acronym, think of an ETF this way. If you own an ETF that attempts to track the Australian stock market and you hear on the news on TV or read online that the stock market has gone up 1% on a certain day, you know that your ETF may have also gone up 1% in value. And if the stock market takes a dive and plunges by 5%, your ETF will have lost 5% in value.
ETFs (or Exchange Traded Funds) are designed to track market indices. An ETF that tracks the key stock market index in Australia (which is called the S&P/ASX 200) will hold the 200 stocks that make up that index in exactly the same proportion as they are weighted in the index. For example, if health care leader CSL makes up 8% of the index, an ETF tracking that index will invest close to 8% of its funds in CSL. It will also invest in the second largest company, the third largest company, the fourth largest company … right on down to the 200th largest company, in the appropriate proportion.
They are “exchange traded” because they are quoted on the Australian Stock Exchange (or ASX) and you invest by buying units on the ASX. You exit the investment by selling the units on the ASX. In all other respects, they operate just like a managed fund.
ETFs have the following key features:
The major issuers include some of the biggest fund managers in the world, such as Vanguard, State Street (under the brand ‘SPDR’) and BlackRock (under the brand ‘iShares’). Other issuers in Australia are BetaShares, ETF Securities, VanEck and Russell Investments.
In recent years, the ETF market in Australia has expanded considerably and there is now a wide variety of ETFs available, covering most asset classes and asset sectors. You can access ETFs that cover:
There are also ETFs that give access to ethical investing, geared investing, yield investing, short investing and other themes.
The main advantage of investing in an ETF is that through a single security, you gain instant exposure to a whole marketplace or asset class. For example, if you invest in iShares IOZ (this is the ASX stock code for the iShares ETF that tracks the S&P/ASX 200 index), you gain access to the top 200 stocks on the Australian stock market. This provides immediate diversification benefits and reduces the risk of investing in individual securities.
ETFs are also low cost. The investment management fees are typically much lower than that charged by active fund managers. You know exactly what you’re getting and you can view how the ETF is invested on the issuer’s website. Most ETFs are also highly liquid, which means that there is an active market on the ASX and it is easy to buy or sell at a fair price.
The main disadvantage is that your investment will only perform as well as the underlying index, less the investment management fee. An ETF will never outperform. And as a managed investment, you’re also paying a management fee (something you do not pay if you invest directly). You also have no control or influence over the underlying investments that the ETF issuer makes.
The top tip is to review the underlying ETF index and understand exactly what it measures. ETFs directly reflect the index they are trying to replicate or track, so if the underlying index is not right for you, you’ll end up with the wrong investment. For example, if you want to invest in global share markets and obtain broad exposure, an investment in an ETF that tracks the S&P 500 may not provide the result you are after, as this will just give exposure to the US share market. If you want exposure to US technology company shares, you may be better off investing in an ETF that tracks the NASDAQ 100, rather than one that tracks the S&P 500.
Bigger ETFs tend to have lower management fees and better liquidity, so be careful with developing ETFs and those charging higher management fees.
Because interest in ETFs is expanding rapidly, new ETFs are being introduced all the time. Some of these are designed around investment themes, and may use a constructed index rather than a recognised market index. These need to be considered carefully. Also, some ETFs invest in derivatives rather than the underlying physical commodity or security. Investment in “synthetic” ETFs should be considered carefully.
ETFs can be an easy way to invest in the share market and other asset classes. They provide instant, diversified exposure. They can be particularly useful in accessing markets or assets that aren’t particularly easy to invest in. ETFs are low cost, liquid and transparent and seek to replicate benchmark performance, not outperform it.