What Are ETFs in Investing A Beginner's Guide

ETFs are a type of investment that's similar to mutual funds, but with a key difference: they trade on an exchange like stocks, making them super flexible and easy to buy and sell.

One of the main benefits of ETFs is that they're often less expensive than mutual funds, with lower fees and expenses that can save you money in the long run.

ETFs can be traded throughout the day, whereas mutual funds are typically priced at the end of the day, giving you more control over your investments.

You can buy and sell ETFs quickly and easily, often in just a few minutes, making it a great option for those who want to be able to react quickly to market changes.

An ETF is an open-ended investment fund that can be bought or sold like any share on the ASX.

Most ETFs aim to closely track the performance of an index or underlying asset, and seek to provide the returns of that index or asset – less any fees and costs.

Unlike buying a single asset, an ETF provides access to a portfolio of assets in one trade, which helps to add instant diversification to a portfolio.

Offering access to almost every corner of the market and every major asset class, Exchange Traded Funds are one of the fastest growing categories of investment products in the world.

ETFs are structured in two main types: physical and synthetic. Physical ETFs own some or all of the underlying securities that make up a particular benchmark.

Synthetic ETFs, on the other hand, use derivatives to provide exposure to an asset class that is hard to access and own physically.

In Australia, synthetic products must have “synthetic” marked in parentheses to help investors easily identify their structure.

As with mutual funds, ETFs represent managed "baskets" or "pools" of individual securities, like stocks or bonds.

ETFs offer several advantages that make them an attractive investment option. They provide access to diverse stocks across various industries, allowing investors to diversify their portfolios with a single investment.

ETFs generally incur lower average costs than buying individual stocks, with low expense ratios and reduced commissions. Some brokers even offer no-commission trading on select low-cost ETFs.

ETFs are also a great way to manage risk through diversification, spreading investments across different sectors to mitigate the impact of poor performance. This makes them generally considered less risky than other investment options.

Here are some key benefits of ETFs at a glance:

ETFs offer several advantages that make them an attractive investment option. Diversification is a key benefit, allowing investors to gain exposure to a range of investment strategies, geographic regions, and asset classes.

Investors can buy and sell ETFs on the ASX like normal shares, with platforms like Betashares direct offering zero brokerage fees.

ETFs are traded on the Australian Securities Exchange (ASX) and can be bought and sold during the trading day, providing liquidity.

Information relating to ETFs, including underlying portfolio holdings and fees, can be accessed at any time via the fund manager's website, offering transparency.

ETFs are a cost-effective option, with no in-built 'active management' fees to worry about, making them a popular choice for investors.

Some brokers even offer no-commission trading on select low-cost ETFs, reducing costs further.

ETFs can be used inside Self-Managed Super Funds (SMSFs), making them a popular choice for this client base.

Here are some of the key advantages of ETFs:

Investing in ETFs comes with primary risks associated with the investment risk of the underlying asset class or strategy.

These risks can be significant, as seen in the example of an ETF that provides exposure to the Australian sharemarket, where movements up or down in the sharemarket can lead to positive or negative investment performance.

For more information on the specific risks of an ETF, you'll need to check the Product Disclosure Statement (PDS) for that particular fund.

The risks of ETFs can be substantial, and it's essential to understand them before investing.

Consider an ETF if you're looking for flexibility in your investment strategy. Intraday trades, stop orders, limit orders, options, and short selling are all possible with ETFs, but not with mutual funds.

ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds. This is because they typically have lower turnover rates, which means they sell fewer securities and generate fewer capital gains.

ETFs are often more tax efficient than index mutual funds. This is due to the way they're structured, with no active management and no need to sell securities to meet investor redemptions.

ETFs offer a wide range of investment options to suit different investor needs.

You can invest in Australian shares and sectors, such as large caps to financials, or international shares and sectors, like the S&P 500 or global healthcare stocks.

There are also property securities ETFs that invest in real estate investment trusts, providing income and diversification opportunities.

Fixed income ETFs wrap up bonds across specific or different sectors, paying regular distributions.

Precious metals and commodities ETFs offer targeted exposure to gold, oil, or resources stocks for diversification.

Foreign currency ETFs can help you bypass the complexity of trading in FX markets.

Diversified ETFs, like the Betashares Diversified All Growth ETF, allow you to gain exposure to several asset classes in one hit.

Geared investment funds, also known as leveraged funds, offer a cost-effective way to leverage your exposure to the sharemarket, but carry more risk.

ETFs can be used as core holdings in a portfolio, and as building blocks for portfolio construction.

A core-satellite strategy involves allocating to diversified investments, which are bought and held for the long term, and adding more tactical positions as the actively managed portion.

Dollar cost averaging involves investing the same amount of money at regular intervals, without regard to market movements, to mitigate market timing risk and accumulate wealth.

ETFs charge fees like all managed funds, and these costs can add up over time. Most ETFs are passive investments, which means they don't charge the high active management fees charged by traditional managed funds.

ETF fees tend to be a cost-effective option compared to traditional managed funds. This is because passive ETFs don't require a team of fund managers to actively pick stocks or bonds, which saves on costs.

These fees can eat into your investment returns, so it's essential to understand how they work. Most ETFs are transparent about their fees, which can be found in the product disclosure statement or online.

Passive ETFs can offer significant cost savings compared to traditional managed funds, often with fees as low as 0.1% per annum. This can make a big difference in the long run, especially for long-term investors.

ETFs come in a wide range of types, each designed to cater to different investment goals and strategies.

Passive ETFs, which dominate the market in Australia, are designed to match a specific index's performance before fees, with all holdings published daily.

Equity ETFs are the most common type, tracking the performance of a specific stock market index, sector, or industry, such as the S&P 500 or a particular industry like technology or healthcare.

Fixed-income or Bonds ETFs invest in bonds and other fixed-income securities, focusing on government bonds, corporate bonds, municipal bonds, or a mix of different fixed-income financial instruments.

Active ETFs, on the other hand, aim to beat the index or achieve a specific return objective by utilizing a significantly higher level of human resources and trading activity.

Commodity ETFs relate to physical commodities such as gold, silver, oil, or agricultural products, with some owning the physical commodities and others using futures contracts to track their prices.

Here are some of the main types of ETFs:

Liquidity is a crucial aspect of investing in ETFs. The open-ended structure of an ETF means that the liquidity of the ETF goes significantly beyond the 'on-screen' volume an investor may see on the trading screen.

The liquidity of an ETF is generally at least as much as the liquidity of the underlying assets held by the ETF. This is because the ETF is designed to track the performance of a specific index or asset, allowing investors to buy and sell shares of the ETF with ease.

Mutual funds and ETFs are two popular investment options, but they have some key differences. Expense ratios, for example, are generally lower for passive ETFs compared to actively managed mutual funds.

Here's a quick comparison of the two:

Overall, mutual funds and ETFs offer a range of benefits and drawbacks, making it essential to carefully consider your investment goals and risk tolerance before making a decision.

Funds and mutuals are often used interchangeably, but they're not exactly the same thing. Mutual funds are a type of investment vehicle that pools money from many investors to purchase a variety of assets.

Mutual funds are required to disclose their fees and expenses, which can be a significant factor in their performance. The average expense ratio for a mutual fund is around 1.5%.

Investors can choose from a wide range of mutual funds, each with its own investment objective and strategy. Some mutual funds focus on growth, while others focus on income or capital preservation.

Mutual funds are also required to disclose their holdings on a regular basis, making it easier for investors to understand their investments. This transparency can be a major advantage for mutual funds.

In contrast, some mutual funds have higher fees than others, which can eat into an investor's returns. For example, a mutual fund with a 2.5% expense ratio will have higher fees than one with a 1.0% expense ratio.

Mutual funds offer a range of unique features that set them apart from other investment options.

Mutual funds can be purchased without trading commissions, but they may carry other fees such as sales loads or early redemption fees. This can eat into your returns, so it's essential to factor these costs into your investment decisions.

Mutual funds have a minimum initial investment requirement, which can range from a flat dollar amount to a percentage of the fund's share price. This means you'll need to have a certain amount of capital to get started.

Unlike ETFs, mutual funds can be purchased in fractional shares or fixed dollar amounts, making them more accessible to investors with smaller budgets. This flexibility can be a major advantage for those just starting out.

Mutual funds can be actively or passively managed, with most funds being actively managed by fund managers. This means they can be more hands-on, trying to beat the market, but also potentially more expensive and riskier.

Mutual funds trigger capital gains for shareholders when a sale of securities occurs, even if the overall investment has an unrealized loss. This can result in tax liabilities, so it's crucial to consider the tax implications of your investments.

Mutual funds may carry other fees in addition to operating expenses, which can add up quickly. Be sure to read the fine print and understand all the costs involved before investing.