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Analyst report
Why an ETF might be just the answer in your share portfolio
February 4, 2008
Brendon Lau, ShareAnalysis
If this sharp bout of volatility has taught us one thing, it would be the importance of diversification. But achieving a well-balanced portfolio is easier said than done. Exchange traded funds (ETF) could provide an easy solution.
ETFs work like listed managed funds. Instead of purchasing a variety of different securities, investors can gain exposure to a wide range of stock indices through a single purchase. There are ETFs for the S&P/ASX 50 and 200 and for the property sector.
These investment instruments are one of the cheapest and quickest ways for investors to gain diversification from our share market. Another useful strategy is to use an ETF, like the SPDR S&P/ASX 200 Fund (STW), as a platform for your investment portfolio.
STW gives you exposure to the top 200 stocks on our market, and you can then buy shares in specific companies that you are more bullish on.
Two of the biggest advantages of ETFs are transparency and cost. Because ETFs are traded like shares on the stock market, investors have greater certainty on how closely aligned the on-market value of the ETF is with the underlying asset(s) held in the ETF. This level of transparency is often missing from mutual funds.
Since ETFs are traded on the share market, operating costs associated with these funds are generally lower than other types of managed funds. For example, management fees for ETFs on the ASX typically range between 0.28% and 1% per year. This compares favourably to the 2%-3% charged by many unlisted funds. There are also usually no hidden fees on ETFs. All costs are built into the spread meaning the difference between the bid and ask price that is quoted on the ASX.
ETFs are a tax efficient investment, given the portfolio is not actively traded. Capital gains tax will only be incurred by individuals when the ETF is sold for a profit. Franking credits and dividends are also available to ETF holders, subject to the normal franking rules. However, ETF providers typically release accrued dividends at fixed times in a year (for instance, STW pays distributions only twice a year), so you might have to wait longer for your dividend cheque.
You should not assume that all ETFs are constructed the same. Pricing behaviour and fees will vary between ETFs and that is why it is important to rely on independent research companies for information. Our research shows that the ETFs issued by State Street Global Advisors may be a convenient investment vehicle for the average investor as the price movements of their ETFs accurately reflect the value of the underlying security (net of associated costs) almost all the time.
ETFs do not only offer exposure to local equities. There are some ETF listings on the ASX that track the performance of overseas share markets. There are also similar products called Exchange Traded Commodities (ETC) that offer investors exposure to a physical material such as gold.
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. Click here for your free trial.
More articles from this edition of CompareShares:
Trader profile: Likely winners and losers from company reporting season
Stocks: Stock Picks for the long haul Harvey Norman, Specialty Fashion Group
Advisor Lounge: Promissory notes
Stocks: Stock of the week Ellex Medical Lasers
Expert Panel (Forex): What is the carry trade and how can I profit from it?
ETFs: Why an ETF might be just the answer in your share portfolio
CFDs: Top ten share CFDs for the week
Companies: Australian broker Tricom in crisis
Smart Investing: Super steers around market timing dilemma
Companies: Chinalco and Alcoa could thwart BHP's bid for Rio Tinto
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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