What are Exchange Traded Funds (ETFs)

ETFs explained

Exchange traded funds (ETFs) are investment funds that hold a pool of assets such as shares, fixed interest investments and commodities. Just like shares, they can be bought and sold on the Australian Securities Exchange (ASX)and Cboe Australia or on overseas exchanges such as the New York Stock Exchange or NASDAQ.

An ETF can provide an investor with diversified exposure by investing in a single fund that includes a range of asset classes such as shares, property and fixed interest. That means an ETF can be a straight-forward and cost-effective way for an investor to diversify their portfolio. ETFs can be structured to track specific investment goals for a particular index, sector, strategy, theme or commodities (such as gold) allowing for greater trading flexibility. Through a single investment, you could gain exposure to hundreds of underlying assets. 

What are some of the advantages of investing in ETFs?

• Diversification - as ETFs consist of a broad range of securities and investments, Exchange Traded Funds are highly diversified investment products.
• Liquidity - ETFs are considered a highly liquid investment and can be bought and sold during market hours
• Cost-effective - ETFs are more cost effective than buying the equivalent portfolio of shares as it only requires one transaction to trade a single diversified investment. Although, be mindful that ETFs have varying annual management costs.
• Accessibility - ETFs can provide exposure to a range of investments that would likely be out of reach for direct investors
• Simplicity – invest in global and local markets through a single trade
• Transparency - ETFs publish details of their underlying assets frequently (sometimes even daily), making it easy to know exactly what underlying investments you own.

What about the risks?

As with all investments, ETFs do contain a degree of risk. And as different ETFs invest in a range of different markets, some will be risker than others. 

• Asset values – ETFs are inextricably linked to the trend of the underlying asset. If the value of the underlying asset falls, the value of the ETF will also fall.
• Trades – certain market conditions (for example, lack of liquidity) could make it hard for you to buy or sell ETFs.
• Asset classes – ETFs that use synthetic investments or derivatives to replicate the performance of an investment could expose you to additional risks and/or losses.
• Foreign currency volatility – Some ETFs with underlying exposure to international assets may have added currency risk.
• Geopolitical risks – the political situation in the home country of the market or benchmark could affect the value of the ETF’s assets.

Before selecting an ETF to invest in, it’s a good idea to read the Product Disclosure Statement or any other disclosure document to make sure it meets your individual circumstances and investing goals.