Key benefits of ETF’s
- Intraday Pricing
- Global Reach
- Quick Transaction
- Increased Choice
- An expanding investor universe
- Portfolio Completion
- Risk Management
- Lower Management Costs
- Lower Transaction Costs
Intraday Pricing – Exchange Traded Funds (ETFs) can be bought or sold at any time during the trading day, just like shares. In contrast, managed funds are priced only at the end of each trading day. The price investors pay is close to the estimated net asset value (intraday indicative value), unlike listed investment companies which can often trade at a discount to their net asset value.
Global Reach – Australians can trade (buy and sell securities) on many stock exchanges across the world. Thereby, should an ETF listed on say, the New York Stock Exchange be of interest to invest in, an Australian investor can swiftly buy (and sell) the fund. Australian investors are unlikely to be able to gain access to American mutual funds (unlisted).
Quick transactions – ETFs can be sold and bought at any time during the trading day with settlement in three days time. Unlisted managed funds can take up to thirty days or more to pay the proceeds of redemption requests from investors.
More choice – ETFs offer far more choice as to the underlying investment markets available. For example, iShares provide direct access to the China, Hong Kong, Singapore, South Korea, Japan, Taiwan, USA and Europe markets, among others. Unlisted index funds do not provide the retail investor with this scope of choice.
An expanding investor universe – Since the launch of the first ETF in 1993, the ETF industry has grown to over US$1.53 trillion in assets with over 3,160 ETFs available around the world.
Portfolio Completion – Investors wishing to gain quick exposure to specific sectors, styles, industries and countries but do not have expertise in these areas can use ETFs to quick accomplish these aims.
Risk Management – If an investor has significant risk in a particular sector but cannot diversify that risk, they could short and industry ETF or buy an ETF that shorts a particular industry
Lower Costs – Costs include portfolio management fees, custody costs, administrative expenses, marketing expenses and distribution. Costs are important in forecasting an investors long term returns. At least in the US there is an ongoing fee war between ETF providers such as low price leader Vanguard and BlackRock’s iShares. Both providers are in competition to gather the most market share by lower prices, evidenced by Vanguard cutting costs on ETFs such as the Vanguard S&P 500 ETF (NYSEArca: VOO).
It is possible to put together a US based ETF portfolio with an average expense ratio of 0.0865 percent. Now that’s cheap.
For that, you can get exposure to 3,549 stocks in more than 40 different countries, 853 bonds and 19 different commodity contracts. You get REITs, emerging markets, oil, grains and gold.
Lower and Transparent Transaction Costs – Because ETF’s can be bought and sold like shares transactions costs are often lower than managed funds which can charge up to 5% of the amount invested. However discount brokerages including E*Trade and Commsec will rebate the entry fees closing the gap. Whether managed funds or ETF’s have lower transaction costs will depend on how often and how much you intend to invest and should be carefully examined
Taxes– ETF’s track indexes – due to lower turnover within the investment portfolio by following this passive approach distribute less taxable capital gains than actively managed funds. Unlike managed funds, ETFs do not need to sell part of the underlying portfolio to pay out exiting investors, triggering capital gains for remaining investors. ETF’s retains its character when distributed to the owner of the shares including franking credits received, which can reduce the tax payable by the recipient.
Transparency – Most ETF’s release their holdings daily; managed funds in Australia have not historically often released their portfolio details, however under new legislation superannuation funds will be required to start providing this detail.