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Peter Switzer talks trading strategies with money market and interest rate expert David Bassanese. On the agenda is Bassanese’s bread and butter – exchange traded funds (ETFs). Spruiking this cheap way of gaining an index exposure to the market may not make him popular with fund managers, but Bassanese is adamant this best kept secret should become common knowledge.

Trade secrets
Bassanese, an Australian Financial Review commentator, recently founded PennyWise Investments.

The idea, says Bassanese, is to offer DIY investors and financial planners some help using ETFs.

“They’re relatively unknown in Australia – they’re big business in the US,” says Bassanese. “I think we’re at the tip of the iceberg in terms of what’s going to be happening in Australia.”

A regular on the investor presentation circuit. Bassanese would often ask what people knew about ETF – even though they’d been on the Australian market for a number of years, he rarely saw a show of hands in acknowledgement.

“I was just staggered because of the benefits of them.”
The finer details

According to the ASX website, ETFs over Australian indices were launched in 2001 and have continued to gain popularity with investors. Each ETF has its own ticket code, so people can go to the online broker and just buy and sell as they like. There are three options on the Australian market:

“State Street runs an ASX 200 fund, and ASX listed property fund and an ASX 50 fund,” explains Bassanese.

“It is an index fund. The difference is it’s listed on the market so you can actually do it yourself, you can buy it yourself without having to fill out forms and go to a fund manager and apply for one. So you get that flexibility being able to buy and sell. You could be a day trader in these things if you want, or a week-to-week trader, or you can just put them away in the bottom drawer of your super fund and it’s a very cheap way of getting an index exposure to the market.”

There’s a major difference between an ETF and an enlisted investment company, says Bassanese.

“The ETF will largely trade at the value of the market so if the market goes up five per cent in a week, the ETF will go up five per cent in a week. They track the market pretty closely.”

But, Switzer asks, what can go wrong?

“The upside is that you’re not going to under-perform the market,” says Bassanese. “The downside is you’re not going to outperform the market. You’re basically going to get the market return.”

This is where things can go awry, especially in a bear market.

“The major benefit of these is they’re cheap,” says Bassanese. He compares them to a managed fund, pointing to studies that suggest that managed funds, on average will struggle to beat the market and their management fees may be up to two per cent. In comparison, State Street’s ASX 200 ETF is just above a quarter of a percentage point.

Such a comparison will hardly earn him any brownie points with fund managers.

“These products exist,” says Bassanese. “In fact, a lot of index funds are used by fund managers as well in a wholesale market. And it’s just something that is now increasingly starting to become available to the retail investor.”

And ETF investors are not limited to the Australian market.

“I’ve mentioned the Australian funds, but in the last year, there’s been a whole suite of international funds that have hit the market as well – emerging markets, China, Taiwan, the US, Europe – there’s a whole suite of funds available.”

Market predictions

On the home front, Bassanese tips an interest rate rise before the year is out and a slow recovery.

“Up until probably a month ago, I was thinking there was probably still scope to cut interest rates,” says Bassanese. “I must admit the bounce back in both business and consumer confidence in Australia has been a surprise, a welcome surprise. To the credit of the Reserve Bank and the Rudd Government, they’ve done well in steering the economy away from a harsh downturn.”

While he says interest rates will be on hold for a while longer, the RBA tends to up rates earlier than many economists predict.

“If the economy holds up, and they see the property market starting the pick up, then they could go early.”

For the US market, Bassanese tips the recession is over and they have a modest growth period ahead, driven by the inventory cycle.

“The big drag on the US economy is going to be consumer spending. We had a brief glimpse of pick up in spending this year, but in the last few months, consumer spending has slowed down a bit. So the recovery there is still looking quite modest until consumers come to the party.”

Still, he doubts there will be a significant pullback on Wall Street.

“Most commentators now agree that the markets have run very hard in the last few months. Everyone’s waiting for a pullback and that’s most likely why we haven’t got one,” he says. “There’s so much money on the sidelines, [with] the fund managers here and in the US, that should there be a pullback, I don’t think it’s going to be very deep.”

For advice you can trust, contact Switzer Financial Services.

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: Thursday, August 13, 2009

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