ETP asset classes
There are conventional and synthetic ETFs available to trade on ASX covering a wide range of asset classes. These include:
There are a wide variety of ETPs that can provide exposure to the Australian market. Most of the ETPs are structured in the form of an Exchange Traded Fund (ETF) with these ETFs seeking to deliver the return of the relevant index by investing directly in either all of the securities or a representative sample of the securities included in the index or benchmark.
There are also Australian sector ETFs. Sector ETFs can assist investors to build their portfolios to allow for increased exposure to certain industries e.g. listed property while still achieving a broad diversification across companies. Investors can also access strategy oriented ETFs such as a high dividend fund, a value focussed ETF or those with a bias towards large or small capitalisation stocks.
Income earned by the ETF including franking credits are distributed back to investors most typically on a semi annual basis.
There are a wide variety of ETPs that can provide exposure to the international market. Most of the ETPs are structured in the form of an ETF with these ETFs seeking to deliver the return of the relevant index by investing directly in either all of the securities or a representative sample of the securities included in the index or benchmark.
International ETPs can assist investors to diversify into overseas markets whilst also diversifying across companies within those international markets. Most international ETPs are structured in the form of an ETF with these ETFs seeking to deliver the return of the relevant index.
International ETPs can be single country e.g. China, multi-country within the same region e.g. Europe and multi-region e.g. emerging markets. There are also international sector ETPs available that may assist investors access sectors e.g. healthcare under represented within the Australian market.
Currently all international ETPs are not hedged against currency movements and may also include additional taxation requirements. Investors should review the risks associated with international ETPs before investing.
Investors can access a wide range of commodities in the form of an ETP which is designed to track the performance of an underlying physical commodity or commodity index. This allows investors to gain direct exposure to the underlying asset without the need to take physical delivery of the commodity or trade futures contracts.
Typically, commodity focussed ETPs are in the form of a Structured Product (SP) and investors should be mindful of the risks associated with the structure of such investments. Typically, commodity ETPs are used to achieve growth within an investment portfolio as opposed to income.
Commodities can include precious metals such as gold and silver, energy commodities such as oil and gas and agricultural commodities such as wheat and livestock. Most commodity ETPs are not currency hedged meaning fluctuations in the AUD exchange rate can affect the value of the portfolio. For example, a weak Australian dollar will increase the value of investments held in non-Australian dollars. On the other hand, if the Australian dollar rises, the value of investments held in non-Australian dollars will fall all other factors being equal.
As a guide for investors, the naming convention of the ETP must reference if the ETP is currency hedged.
Fixed income ETPs are currently structured in the form of an ETF or MF. These fixed income ETFs are issued over a basket of bonds which can be issued by a variety of domestic and international corporates, Australian Commonwealth, State and Territory governments, government treasury corporations and international governments / semi government entities. Typically the underlying index tracked will have a variety of bonds with varying maturity dates and as one bond matures, it will be replaced by another as to ensure there is sufficient diversity in the portfolio being tracked.
Fixed income ETPs can help investors access a more reliable income stream with typically less price volatility than other classes such as shares. This is why investing in this asset class is often referred to as defensive. Typically a fixed income ETP will distribute the income earned on a quarterly basis. Specific details regarding the risks of fixed income ETPs are available.
Single asset fixed income ETPs are linked to individual bonds. Generally the products are automatically redeemed on the maturity date of the underlying bond however there may be a case for early redemption if the underlying bonds are redeemed, cancelled, bought back, subject to early maturity or otherwise terminated. Investors are advised to read the product disclosure statement for each single asset ETP to ensure they fully understand the risks involved. Specific details regarding the risks of single asset ETPs are available.
Currency ETPs can assist investors diversify portfolios without needing to access the FX markets, currency brokers or opening a foreign currency bank account. Currencies are historically a non-correlated asset class that can be used to reduce the overall volatility of an investment portfolio.
The current range of currency ETPs are all structured as ETFs and allow investors to take a view against the Australian dollar.
Investors can access an ETPs that aims to achieve interest rates that are competitive with 'at call' bank deposits and term deposits without opening a bank account or locking up capital for extended period. Interest is paid on the holding monthly thus providing regular income returns.
Unlike fixed income ETFs, the capital value of a cash ETP will not decline in a rising interest rate environment.
Cash ETPs can assist investors achieve a core cash allocation in a portfolio and / or assist in providing a short term solution in-between investment decisions.