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Tracking indices through ETFs

ETFs can be simple, low-cost ways to gain exposure to markets. While stocks, bonds, commodities and real estate have been around for centuries, ETFs have revolutionised how investors access these assets.

With any ETF it's important to review the underlying ETF index and understand exactly what it measures. Index ETFs directly reflect the index they are trying to replicate or track, so if the 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 ASX200 may not provide the result you are after as this will just give exposure to the Australian 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 and so on.

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.

How index funds have revolutionised investing

Watch this video of Martin Small from iShares by BlackRock “bridging” the connection between electric guitars and index investing as revolutionary vehicles of change.

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