Can I trade ETFs?

Can I trade ETFs?

Exchange traded funds (ETFs) are a low-cost way to earn a return similar to an index or a commodity. They can also help to diversify your investments. You can buy and sell units in ETFs through Focus, the same way you buy and sell shares.

How ETFs work

An ETF is a managed fund that you can buy or sell on an exchange, like the ASX or NSX.

In Australia, most ETFs are passive investments that don't try to outperform the market. The role of the fund manager is to track the value of:
  1. an index, for example the ASX200 or S&P500
  2. a specific commodity, such as gold
The value of the ETF goes up or down with the index or asset they're tracking.

The ASX ETF investor course can help you learn more about how ETFs work.

Types of ETFs

Physically-backed and synthetic ETFs

ETFs can be either physically-backed or synthetic.

  1. Physically-backed ETF – invests in all the securities in the index or a sample of the securities in the index.
  2. Synthetic ETF – hold some of the underlying assets and use swaps to copy the movements of an index or asset. If an ETF is synthetic, it must use the word 'synthetic' in its name. Synthetic ETFs have an additional risk that the counterparty in the swap agreement could fail.
When you invest in an ETF, you don't own the underlying investments. You own units in the ETF and the ETF provider owns the shares or assets.

What you can invest in through an ETF

ETFs are available for a range of asset classes and individual assets.
These include:
  1. Australian shares
  2. international shares
  3. sectors of the Australian or international share market, such as mining or financials
  4. fixed income investments like bonds
  5. precious metals and commodities
  6. foreign currencies

What's not an ETF

Some products track an index or asset and 'look' like an ETF. But they're not ETFs and they can be riskier. These products include:
  1. exchange traded commodities
  2. exchange traded notes
  3. exchange traded certificates
  4. exchange traded securities
There are also exchange traded managed funds and exchange traded hedge funds. With these, the investment manager tries to outperform an index and may use high risk trading strategies.

Pros and cons of investing in ETFs

Weigh up the pros and cons before you invest in ETFs.

Pros

  1. Diversification – ETFs allow you to buy a basket of shares or assets in a single trade. This can help to diversify within an asset class. ETFs also allow you to invest in markets or assets it can be difficult or expensive to access. You can also diversify across ETFs so there's less chance of loss if an ETF provider collapses.
  2. Transparency – ETFs publish the net asset value (NAV) daily on the ASX. This can help you track how the underlying asset are performing and if the price of the ETF is close to the NAV.
  3. Low cost – a lot of ETFs have a low management expense ratio (MER). They're usually cheaper than most actively managed funds.
  4. Easy to trade – you can buy and sell ETFs during the trading hours of the exchange.

Cons

Market or sector risk – while ETFs can help you diversify, the market or sector the ETF is tracking could fall in value. For example, if the ASX200 declines, the value of your ETF investment will also fall.
Currency risk – if the ETF invests in international assets, you face the risk of currency movements impacting your returns. Some ETFs are 'currency hedged' which removes this risk.
Liquidity risk – some ETFs invest in assets that are not liquid, such as emerging market debt. This can make it difficult at times for the ETF provider to create or redeem securities.
Tracking errors – an ETF's price can move away from the value of the index or asset it's designed to track. This can be due to a lack of liquidity of the underlying assets, fees, taxes and other factors. This means you could buy or sell when it's not trading at the net asset value (NAV).

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