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You may have heard the words Exchange Traded Fund or the acronym ETF bandied about and wondered what on earth it was all about. In truth, ETF’s have been around for many years but they seem to have recently reached peak popularity within the investment community.
What is an ETF?
An ETF is an investment that is traded on a stock exchange, such as the ASX.
The objective of an ETF is to benchmark the performance of a certain index (like the ASX 200) and return you the same result as that index, less any costs. As a fund, your ETF investment gives you access to a portfolio of companies (shares), bonds or other asset types (such as commodities or property). The list and types of ETF’s available continues to grow as the popularity of this style of investment grows.
How does an ETF work?
Just as with a share investment, an ETF is traded on a stock exchange. Most ETF’s have a fairly liquid trade + 3 days trading terms as with any other direct share investment. This is one of the differentiating factors between a managed fund and an ETF, with managed funds typically having at least a 10 day settlement period and also the possibility of being frozen in periods where considerable withdrawals may have occurred.
When you buy a single ETF, this gives you exposure to a specific market. For instance, there are ETF’s available that offer investment opportunities in just European markets, just Global Healthcare or only Emerging Economies to name but a few. The list of available ETF’s and ETF providers is growing considerably as demand increases and products become more advanced.
What does an ETF cost?
Typically, the cost of an ETF depends on the provider who issues it and the trading platform that you use to buy it. As ETF’s are bought and sold just like normal direct shares, brokerage costs will be applied to trades.
In addition to this the manager of the ETF will overlay a Management Cost, which is usually done on a percentage basis and covers the cost of management, trustee costs, licencing and rebalancing.
Where can I learn more about ETF’s?
Exchange Traded Funds are not for everybody, and their suitability depends on a variety of factors such as risk profile, asset allocation and your own personal objectives.
If you are interested in learning more about whether an ETF investment would be suitable for you, feel free to contact our office here. We offer a complimentary first appointment with an independent financial adviser and would be happy to further discuss all of your investment needs.
Disclaimer: The information on this site is of a general nature only. This is not a recommendation or endorsement of any product or investment. It does not take your specific needs or circumstances into consideration. You should look at your own personal situation and requirements before making any financial decisions or consult the advice of an accountant or financial adviser.