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As traditional markets and industries flounder and ‘start-ups’ become overnight success stories through venture capitalism, crowdfunding and all sorts of ‘alternative capital raising mechanisms’, fund managers and the traditional financial sectors have been called to account.
This generational change is being driven by technology and a new found need for transparency & regulation – in large part in Australia thanks to the 2018/2019 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry which saw a once powerful banking sector challenged like never before.
With the ease of access for any Australian with a tax file number to become online traders through registered share broker platforms – such as IG Markets or CommSec – never has the retail investor had access to so much financial information and so many financial instruments from the comfort of their very own home.
Although this can be seen as empowerment, it must be noted that the financial markets are not a place for the fainthearted. A little bit of knowledge in finance is a dangerous thing, as many inexperienced investors have found out first hand, losing thousands or hundreds of thousands of dollars through investing in products they simply knew nothing about – especially leveraged products – and coming out the other side of a bad trade.
The share market in Australia, the ASX or Australian Securities Exchange offers a market for the buyers and sellers of shares in a company that has listed on the stock exchange. To get there, the company needed to meet a range of regulatory hurdles as set out by ASIC or the Australian Securities and Investments Commission as well as the Commonwealth Corporations Act 2001 and a range of other regulatory frameworks.
Once listed, these once private companies move to be public companies and investors can buy and sell their shares at will, enjoying their profits and lamenting the losses when the company is not tracking as well.
The beauty of shares is that the amount you invest in an Australian listed company is all that you can lose. The upside of this is you can realise a capital gain of the share price, not to mention dividends paid periodically.
There is a wide range of products available today that create financial risk, these can increase your personal liabilities far beyond the amount originally invested through leverage or speculative instruments that really should be left to the professionals.
The actual process of buying and selling an exchange traded fund Is traded in much the same way as a regular share, but it is a fund, not a company.
There is usually no minimum investment – unlike most managed funds – only that your minimum investment as per your online brokerage will apply. Most in Australia sit at around $500 as a minimum investment.
In addition, like a company share, your part or share of the exchange traded fund is able to be sold, added to or traded when you feel as though doing so, as they as more often than not, highly liquid and easy to buy on the major exchanges around the world.
An exchange traded fund is effectively a pool of tens, hundreds, or sometimes thousands of stocks or bonds in a single fund[1]. Not just is it a pool of stocks or bonds, it is also a pool of investors’ money that is stockpiled into the fund to create the exchange traded fund.
Exchange traded funds offer a steady investment option, in which returns are consistent and losses somewhat mitigated through the diversification of these large accounts. Rather than putting all your eggs in one basket, your risk is spread.
Exchange traded funds are low cost in terms of their management fees and only attract a small brokerage fee & spread from your investment broker when you buy and sell, whereas other funds or investment options can attract large annual percentage fees as well as performance fees.
Transparency and accountability on exchange traded funds is high, with the ASX requiring them to release the mix of shares, the spread of markets and the performance on a daily basis so retail investors can make informed decisions.
In addition, as an investor, you have access to all the features that are available to stock investors, including the option to short or use limit and stop orders, not to mention being able to buy and sell as you wish while the exchange is open.[1]
Finally, there is risk management, exchange traded funds are exposed to risks, but not the same microeconomic risks or company-specific risks that investing in a single company would. This allows risk adverse investors some peace of mind that their risk is spread.
When it comes to the cons, they are certainly not as vast as the pro’s for exchange traded funds, however, they certainly do exist.
If you are trading in foreign markets such as the Nasdaq example given earlier, you will be exposed to foreign exchange and foreign market risk. Currencies move as do share prices, so although you may see again on paper, the cost of moving it into Australian dollar, and the transaction fees need to be taken into consideration.
Fund managers are not doing it for free, however, your returns will never exactly match the index that you are tracking with your exchange traded fund when you need to apply the management fees and brokerage fees.
There is market volatility in any investment and this should be expected, although exchange traded funds provide protection through economies scale and diversification of the asset mix and there are still risks that can fall upon the investment.
[1] https://www.canstar.com.au/etfs/pros-and-cons-of-exchange-traded-funds/
