Exchange traded funds (ETFs) are funds that trade on a stock exchange, similar to regular shares. They combine the simplicity and cost-effectiveness of share trading with the investment advantages of a regulated fund. ETFs allow you to quickly and inexpensively access markets and asset classes that you would not otherwise have access to, such as debt, derivatives, currencies, and commodities. One straightforward ETF transaction will let you diversify your portfolio because each unit of an ETF is a basket of assets that frequently matches the results of a specific index or benchmark.
Like common shares, each ETF has an ASX code and trades at a unit price comparable to the underlying portfolio’s net asset value. Due to the open-ended structure of ETFs, you are free to join and exit them at any time (subject to liquidity). ETFs are collections of securities produced by issuers or fund managers. Typically, the goal of each ETF is to mimic the performance of a specific index or benchmark. Each ETF is given an ASX code and is listed on the Australian Stock Exchange as a distinct entity. ETFs are traded and settled like regular shares with a $500 minimum investment.
ETFs have an ASX code that you use to exchange and track their value. Exchange settles like common shares. ETFs can be acquired at the current market price at any time during the trading day through an online brokerage account. Investors will utilize a variety of trading strategies, and there are no compulsory holding periods.
ETFs are a quick, economical approach to achieving diversification. A single transaction will spread your investment across multiple units of the ETF because each unit represents a basket of securities. They reduce the individual stock risk, or the risk associated with exposure to just one company, by giving users access to multiple companies or assets in the same transaction. Offering this exposure through an ETF structure helps to reduce the probability that a handful of particular equities would adversely effect the portfolio’s performance.
The minimum investment for an ETF trade is $500, and brokerage is the same as for a conventional Australian share trade. ETF management fees are generally less costly than those of managed funds. In contrast to managed funds, most ETFs offer lower management fees and operating costs because they are passively managed. Due to the low turnover of the majority of ETFs and hence the indexes they track, transaction costs are kept to an absolute minimum. Investors will keep a large proportion of their returns once expenses and fees are low.
ETFs that provide access to global markets are susceptible to currency risk, which can diminish or increase returns. Funds that enable exposure to emerging markets or leverage may also have higher volatility. An illiquid market may have an impact on the buy/sell spread.
Any advice provided by Investor Desk is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
