ETF’s boom

ETF's boom

When it comes to innovation and change in the investment world at the moment, ETF’s – Exchange Traded Funds, are where all the action is for retail investors.  With around $25billion of investment held in ETF’s on the Australian share market, and growing fast, their importance is not to be under estimated.  To put that in context though, that $25billion represents around 2% of the total value of the Australian market, so ETF’s are far from crowding out the rest of the market participants.

ETF’s kicked off in the US in the 90’s, and really gained traction in the early 2000’s.  Australia was a little latter to the party, but we’re certainly making up for lost time now, with Morningstar estimating growth in funds invested through ETF’s of 20% in 2016, and that’s off the back of around 50% growth each year from 2012 to 2015.

So what do you need to know about ETF’s?

  • An ETF is a fund, bought and sold on the stock exchange, just like an ordinary company share.
  • Each ETF will usually represent a particular market or sector.  So for instance STW delivers to the investor the ASX200 index, or IVV the US S&P500 index.
  • The ETF will hold the underlying stocks in the market they aim to reflect, and will buy more, or sell down, to ensure that the price the ETF trades for, accurately reflects the value of each ETF share.
  • An attraction of ETF’s is that they are typically low cost.
  • ETF’s usually build their portfolio by some sort of mechanical, rules based process.  They don’t employ analysts to make judgement calls (this is a reason why they are lower cost).

Initially in Australia we saw only the ETF mainstay’s of market weighted index’s, but innovation is starting to arrive.  ETF’s focused on dividend generation (eg. VHY), companies operating in the sustainability space (ETHI), and funds using allocations methods other than market weight, such as the equal weight MVW.

In the US though, they’ve gotten far more creative, and show us where things are likely to head.  They have an ETF whose code is SLIM, and calls itself the obesity ETF.  It invests in companies that stand to profit if obesity is reduced globally.  Another call CHAD gives the reverse of the Chinese share market.  So if you think the Chinese market will drop, you could buy this, and if you’re right, you will profit.  Or how about UBIO which covers the Nasdaq biotech index, but uses borrowings to magnify outcomes 3x.  So if that index rose 10%, an investor in this index would see a gain of around 30%.  And how about FANZ, an ETF that tracks the major sponsors of sporting events such as basketball, baseball and American football.

ETF’s are a great addition to the investment landscape, and it’s wonderful that in Australia we’re starting to see some great offerings become available.

Important Information:

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

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About the Author

Paul Benson is a Certified Financial Planner with the Financial Planning Association of Australia, and a Self Managed Super Fund Specialist with the Self Managed Superannuation Association. He is also a member of the Responsible Investment Association of Australasia, and the Ethical Advisors Co-op. He is the proud owner of Guidance Financial Services, a boutique financial planning practice based in Essendon, not far from the Melbourne CBD. Guidance currently manages around $100 million in investments on behalf of their clients, providing bespoke financial planning strategies.

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