An ETF is a managed fund or unit trust that is quoted and traded on a stock exchange such as the ASX. ETFs are built like managed funds, but trade like shares, meaning that pricing is transparent and that the products can be bought and sold throughout any trading day just like ordinary shares. ETFs generally aim to track as closely as possible the performance of a given index or asset class. They are transparent, liquid, cost-efficient and flexible investment tools – designed to be attractive to both individuals and institutional investors.
ETFs are one of the fastest growing categories of investment products in the world, with over $US3 trillion of assets managed un ETF products.
One of the primary reasons for their popularity is that they have all the advantages of stocks, such as being easy to trade and liquid, along with the benefits of index funds, such as diversification and lower costs. With ETFs, it is possible to get a diversified exposure to a large number of securities or an otherwise difficult to access asset class via a single trade and at the same time avoid ‘active manager’ fees.
The Australian ETF, while comparatively small, has recently growth dramatically. We expect this to continue due to new product innovation and increasing acceptance of ETFs as an asset class in the Australian marketplace.
How do investors use ETFs?
ETFs can be used as core holdings in a portfolio and as building blocks for portfolio construction. For example, sector ETFs offer diversified exposure to a particular industry sector that could otherwise only be achieved by buying all the stocks in the relevant index. As another example, commodity ETFs provide exposure to this alternative asset class in a simple, cost efficient manner
Advanced trading using ETFs
Pairs Trading: ETFs offer several opportunities for pairs trading e.g. going long an index and shorting some of the constituents or buying put options in RIO and buying Beta shares MNRS ETF (mining ETF)
Hedging: Since ETFs are traded on the ASX, investors can short the ETFs as they would any stock, subject to availability of stock lending.
Examples of ETFs
| Code | Name | Exposure |
| AAA | Australian High Interest Cash ETF | Assets are invested in high interest bank deposit accounts with one or more major banks in Australia |
| YMAX | Australian Top20 Equity Yield Maximiser Fund | Core exposure to a diversified portfolio of the largest Australian companies. Smooth equity returns through potential reduced volatility |
| QCB | Commodities Basket ETF – Currency hedged | Includes energy, agriculture, industrial metals, livestock and precious metals. No exposure to coal and iron ore (aimed to diversify from RIO, FMG and BHP). |
| RENT | AMP capital global property securities fund | Property securities offer investors opportunity for a good source of income and protection against inflation. Access to investment opportunities that may otherwise require large capital outlays. |
| BNKS | Global Banks ETF – Currency hedged | Tactical exposure to the global banking sector excluding Australia. A core component of a global equities allocation providing transparency and diversification |
| BEAR | Australian Equites Bear Fund | The first managed fund in Australia to go up as the market goes down. Can be used to seek profits when markets decline. |
Source: ‘BetaShares’ www.betashares.com.au
