What is an ETF?

In finance, we love an acronym and one that you may be hearing more frequently is that of the ETF. Exchange Traded Funds (ETF’s) are one of the fastest growing investment products in the world today.

They offer investors a simple and cost effective way to achieve significant diversification in their investment portfolios. They kind of blend the benefits of managed funds and shares together.

 

ETF’s can be bought and sold on a stock exchange just like shares. And like managed funds, they contain a mix of shares designed to track a certain index. This can be as broad as a few hundred shares in the case of an index like the ASX300 Index or as narrow as 20 holdings in the case of the ASX 20 Index. This diversification can help to reduce concentration risk in portfolios and means investors can use ETF’s to gain the exposure and diversification they want quickly and simply.

ETF’s can provide great asset allocation and exposure to hard to get investments like gold, commercial property, or emerging economies.

Most ETF’s are index funds meaning they seek to match the components of a market index. This differs from active managed funds where the fund manager is attempting to “beat” the market index.

Generally, ETF’s are more cost effective than investing in actively managed funds. They can also be less costly than purchasing a large number of direct shares as there are less trading costs.

ETF’s have many benefits including flexibility, tax efficiency and liquidity as they trade like a share. They are also transparent so you can see all the holdings within the ETF you hold on a daily basis.

As with all investments, we strongly recommend you seek advice to see if this type of investment may be appropriate for you.

General Advice Warning - This communication has been prepared on a general advice basis only. The information has not been prepared to take into account your specific objectives, needs and financial situation. The information may not be appropriate to your individual needs and you should seek advice from your financial adviser before making any investment decisions.