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    Exchange Traded Fund – the benefits and drawbacks

    Exchange Traded Funds or ETF’s are funds that trade a particular index and aim to provide returns to that index. For example, SPDR® S&P®/ASX 200 Resources Fund, which is set to trade the return of the A&P/ASX 200 resources index, or the VanEck Vectors Australian Banks ETF provides exposure to the largest ASX-listed companies that generate at least 50% of their revenues or assets from the Australian banking sector.[1]

    [1] https://www.marketindex.com.au/asx-etfs#aust-index-tracking


    Investors can use ETFs for cost-effective, easy access to markets and asset classes you might not otherwise have access to, such as debt, derivatives, currency and commodities.[1] In addition, thanks to them being available to trade and listed through the ASX, they are available through your online share brokerage, such as a share in a company would be.

    There is a range of benefits for the advantage with exchange traded funds over financial instruments, these include:

    • You can buy and sell any time of the day
    • There are lower fees, as only the brokerage commission is payable
    • They are tax efficient, as investors have control of when they need to pay the capital gains tax
    • They are traded like regular shares, so investors can control them through limit orders, stop-loss orders and buy on margin, which is not possible in other fund types

    There is a range of drawbacks to exchange traded funds as well:

    • Settlement of 2 days is required for ETF’s, making the funds not available to reinvest for 2 days
    • Tracking errors can occur if the fund doesn’t explicitly track the index as it should, leaving potential losses or missed opportunities
    • Illiquidity – some thinly traded ETF’s have wide bid/ask spreads and as such you buy high and live 



    Is an exchange traded fund for you?

    Exchange traded funds are not for any one type of investor, unlike many managed funds and other financial instruments. There is no minimum $50,000 or $100,000 minimum investment, the minimum buy-in is usually whatever your minimum trade on your online trading platform is – usually around $500 – will allow you into the world of exchange traded funds.

    Unlike other managed funds, which often have a dedicated payout time or sunset clause, with exchange traded funds be readily available and traded on the ASX, you can get in or out at any time.

    ASIC says ETF’s “can be a simple and low-cost way to get investment returns similar to a share index or another underlying asset”.[2] They are also the perfect investment vehicle for new or first-time investors as well as those investors that don’t want to expose themselves to a high level of risk – such as people looking toward retirement.

    In any financial service or product, there are risks involved, it is always prudent to speak with a financial planner or professional before starting out in exchange traded funds as part of your personal financial journey.   

    [1] https://www.commsec.com.au/products/exchange-traded-funds.html

    [2] https://www.moneysmart.gov.au/investing/managed-funds/exchange-traded-funds-etfs

    We welcome you to give our team a call to discuss your investment goals and objectives.

    You can call Walker Capital Australia on +61 2 8076 2210, and we’ll see how we can help you achieve your investment goals.

    Want to read more great information on Exchange Traded Funds? Check out our Exchange Traded Funds article: Exchange Traded Funds