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Q&A – Help with ETFs

My wife and I would like to invest in the share market in the near future and I have seen guests on your show discuss ETFs. What are the pros and cons of investing with an ETF? And how would we select one to invest with? We are looking at investing for a period of around ten years and have no previous experience investing in the share market.

Firstly, you mentioned you have no experience investing in the share market. I suggest you consider asking for some help in this regard from a good financial adviser. A good financial adviser will be able to provide you with more details on specific Exchange Traded Funds (ETFs) and build up your understanding of investing on the share market. Even though ETFs are a more simple investment, they still have risks you need to understand before you use these products.

Overall, there are currently four groups of ETFs traded on ASX, these being:

  • Domestic Index ETFs (tracking three established domestic indices currently)
  • International Index ETFs (tracking key global indices currently)
  • Commodities (including gold, palladium, platinum and a basket of precious metals)
  • Sector Index ETFs (tracking key global sector indices).

The Domestic and International index ETFs seek to replicate the performance of a specific index and are traded and settled on the ASX in Australian dollars.

Note that the current range of international ETFs are not hedged, this means that fluctuations in the exchange rate can affect the value of the portfolio. With hedging, I like to think of holidaying in Europe (always a nice thought) – if the Australian dollar goes up, it gets cheaper to go to Europe and if I had already bought my Euros I would be losing money because I can purchase more Euros the higher the AUD goes. This is the same logic for an unhedged share portfolio – that is, if the Australian dollar rises, this could more than offset any gains in international stock markets.

The features of ETFs include:
  • Purchases and sales are conducted during normal ASX trading hours so you do not have to worry about when international markets are open to trade.
  • Information on your investment is available through daily newspapers and websites.
  • Transactions are settled in three days (T+3) so you can get your money back quickly if you need the funds.
  • Brokerage fees will generally apply (but if using an internet broker these fees are usually very low).
  • ETFs charge a management fee for looking after the fund and you should ensure you know what this fee is before investing. (Note that with ETFs this management fee tends to be a low in comparison to unlisted managed funds.)
  • There is no stamp duty incurred when buy and selling shares on the ASX and this includes ETFs.
  • ETFs are subject to supervision through initial and ongoing ASX requirements.
  • Derivative products over ETFs offer investors flexibility to borrow or hedge their investments (please note that any sort of borrowing or hedging involves more risk and you should be sure you fully understand what risks you are taking if using gearing and hedging via derivative products).

There is a wealth of information available on ETFs on the ASX website. As a minimum, I would recommend you go to the site to find out more about ETFs before making any investment decisions.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Monday, September 28, 2009

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