What is an exchange traded fund?
Exchange traded funds (ETFs) enable you to get investment returns similar to that of a share index or other group of underlying assets through a single purchase and for a relatively low cost.
ETFs are listed on the stock exchange and can be bought and sold like shares. They aim to replicate the performance of the underlying index or group of assets by investing in their component parts.
You can use ETFs to gain exposure to a range of different asset classes including:
- Australian shares
- International shares
- Commodities
- Currencies
- Fixed interest and
- Cash
There are more than 90 ETFs listed on the Australian Securities Exchange (ASX), including ones that track the largest 20, 50, 100, 200 or 300 companies.
You can access ETFs that track specific sectors too, like financials or resources, or a specific theme, such as high dividends or small companies.
There are also ETFs that track the performance of shares in many different countries or regions so you can get exposure to companies all around the world.
When you invest in an ETF you buy units in the fund, which are listed on the ASX, and rise and fall in value on a daily basis, usually in line with the assets in the fund.
What are the benefits of ETFs?
- Diversification - provide exposure to lots of different assets through just one trade-
- Accessibility - access to asset classes that are otherwise difficult to reach
- Low cost - generally cost less than other managed funds
- Transparency -ETFs are listed on the ASX so you can monitor their value and holdings daily
What are the risks?
ETFs can fall in value so you could lose money. There is also a chance an ETF won’t exactly replicate the index it tracks, due to fees, taxes and other factors, which is known as 'tracking error'.
If you’re investing in ETFs that track international shares, they will carry a currency risk if they are not hedged back to Australian dollars.
Some ETFs are more risky than others, so it’s important to read the product disclosure statement (PDS) provided by the ETF issuer and ensure that you fully understand what you are investing in.