This article appeared in the May 2011 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
Learn about exchange traded funds in this exciting, interactive free ASX course.
By Joseph Dickson, ASX
The new suite of free ASX online courses is getting excellent feedback from users as being clear, practical and easy to use. The latest in the series has just been launched and is on exchange traded funds. (ETFs) <insert hyperlink – ask Joe for Link>
It is good timing, because ETFs have become increasingly popular and more types of ETFs are being made available on ASX. In fact, keeping up with new products was one of the challenges in developing these courses.
A feature of the courses is that they provide balanced, independent education, free of clutter, long-winded brochures, or sales pitches. Each screen is restricted to a small amount of concise text, accompanied by simple graphics and exercises to assist understanding.
The ASX ETF course has seven modules covering the fundamentals of what ETFs are and how to buy and sell them. Subsequent modules take a detailed look at particular types of ETFs, including a case study.
The modules are self-directed, meaning you can work through them sequentially or go from, say; domestic ETFs to international ETFs or exchange traded commodities (ETCs). Each has summary slides and a quiz to help you be confident you have grasped the concepts.
Best of all, you can do the online course when and where you like, at your own pace, and print the notes. All you need is an internet connection and computer.
Listed funds trading like shares
Simply put, ETFs are built like a managed fund, and bought and sold like a share. They are a listed investment fund that invests in a basket of securities or other assets, and seeks to track the performance of a specified index, such as the S&P/ASX 200.
There are three main differences compared with unlisted managed funds. ETFs are listed on an exchange, typically have lower fees than active managed funds and, unlike managed funds, do not seek to outperform a particular benchmark index. Like managed funds, ETFs offer diversification – they are based on an index that may comprise dozens or hundreds of shares.
You may have read about ETFs in the investment media or started using them for your portfolio or self-managed super fund (SMSF). The ASX ETF market is growing rapidly. The combined market capitalisation of ASX-listed ETFs rose 42.5 per cent to $4.6 billion in the 12 months to March 2011. Fourteen new ETFs were listed during that period and average monthly ETF turnover increased.
ETFs are popular with investors who are happy with an index-like return, prefer lower-cost investment products, like the transparency that comes with investing in listed products that are easier to buy or sell, always have a clear price and provide instant diversification.
A variety of uses
ETFs are not new products. This year is the 10th anniversary of their first listing on ASX, and they have been used overseas for several decades. ETFs worldwide held almost $US1.4 trillion in assets under management in April 2011, according to BlackRock research.
As with any investment product, it is important to understand the benefits and risks of ETFs, and whether they suit your investment needs. Not all ETFs are the same and they have specific risks, such as tracking errors, which occur when an ETF provides a return different to its underlying index.
Also, ETFs can be used very differently. Some investors use them for passive long-term exposure to local or international markets. Others use them tactically to take advantage of short-term market opportunities. More self-managed super funds use ETFs as part of a “core and satellite” strategy that includes ETFs in the portfolio core for low-cost index exposure, and shares or other investment products as portfolio “satellites” that can outperform the market. It is possible to borrow over ETFs using margin loans or ASX-listed instalment warrants.
Furthermore, as the ASX ETF market grows, different types of ETFs are expected to be issued. ETFs over local and international indices have been joined in the past 18 months by ETFs over sectors, small and large-cap companies, and higher-yielding companies. Synthetic and currency ETFs have been listed and ASX-listed exchange traded commodities have a different structure again to ETFs.
The message is obvious: invest in education before investing in ETFs, or any investment product for that matter. Take advantage of the ASX online ETF course today <insert hyperlink again> and tell your friends about it if you find it useful and think it could help them with their investments.
About the author
Joseph Dickson is Courses Coordinator, ASX Investor Education
The Exchange Traded Funds and Exchange Traded Commodities page has more detailed information on these investment products.
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