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For the first episode of The Richards Report I spoke with Damien Sherman, Head of ETF Capital Markets at Vanguard Australia, about exchange traded funds (ETFs).
Here is a snapshot of some of the topics discussed:
What are exchange traded funds?
- An ETF is essentially a managed fund listed on the exchange. Within the fund is ownership of certain types of assets (e.g. equities/shares or types of bonds).
- The benefits of having it on the exchange is that it’s priced during the day so you can actively monitor it, and also buy or sell.
- ETFs are typically index-based, which gets you exposure to different kinds of assets (Australian shares, global shares, infrastructure, etc). An example of an index is the S&P ASX 200. By buying this index you own a share of the 200 companies on the index in the same proportion that they’re on the market. This means that you will own greater percentage of the biggest company, first on the index relative to the smallest company – the 200th.
- ETFs have become popular to create a low-cost, diversified investment portfolio.
Can you outperform the market with an ETF? Index ETFs aren’t usually designed to outperform the market – they’re designed to perform at the market. However, the key benefit of ETFs is that you get the market exposure, but at a fraction of the cost of traditional ways of diversified investing – you don’t have to go out and actually buy 200 different shares to mimic the performance of the ASX 200.
- The key risk with ETFs is market exposure. What does that mean? As the market goes up or down so too will the value of your ETF.
- During the podcast we also discuss the extra risks involved with geared and synthetic ETFs.
Each ETF has a management expense ratio (referred to as an MER). This is typically very small (on the Australian share ETF it’s .14%) which equates to $14 on a $10,000 investment.
Some questions to ask yourself when considering the quality of an ETF:
- Is it tracking a high-quality index? e.g. Is it tracking the S&P, MSCI, FTSE?
- What fees does the ETF provider charge? Are the costs low (this can be controlled, whereas returns can’t usually be controlled)?
- Is it liquid? Is it traded a lot? If not, then there could be a drift from the net asset value (NAV).
- Is it geared or synthetic? These types of ETFs can increase risks.
As Damien mentioned during the podcast, you can also find out more information on Vanguard’s ETFs at the Vanguard Knowledge Centre.
At Six Park we use a portfolio of quality ETFs to give clients exposure to a recommended asset allocation for their own individual circumstances. We invest over seven different asset classes and rebalance portfolios free of charge as needed, overseen by our investment advisory committee.
I hope you enjoyed this podcast, please leave me feedback on iTunes, or contact me on twitter with ideas of what you would like to hear discussed.
Ted Richards is Six Park’s Director of Business Development.