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 stock exchanges, such as the ASX in Australia.
An ETF can provide an investor with diversified exposure by investing in a 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. And if an ETF is listed on the ASX, it can be bought or sold during ASX trading hours, making it a highly liquid investment as well.
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 - with an ETF it only requires one transaction to trade a single diversified investment.
- Accessibility - ETFs can provide exposure to a range of investments that would likely be out of reach for direct investors
- Leverage - they can be traded using gearing facilities such as a margin loan
- 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. An ETF that focuses on international markets, for instance, could expose you to currency risk.
ETFs can be used as a strategy to diversify risk by investing across markets. However, there is still the risk that you could lose some or even all of your investment if the value of the underlying assets decreases. 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.
Things you should know
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