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An exchange traded fund or ETF is a financial instrument or investment fund that allows investors to realised return similar to an industry or underlying asset class that they are tracking.
According to ASIC, they are a “simple and low way to get investment returns” rather than investing in one specific share that fluctuates based on a range of microeconomic variables that affect the company alone, the exchange traded fund trades are not.
They most certainly are affected by the macro economic conditions that plague the overall market, or the industry specifically, thus affecting the Index itself.
Similar to that of any fund, an exchange traded fund is a pool of investors’ funds pooled together to gain economies of scale and take on positions in size that are not attainable as an individual investor alone.
These pools of funds in managed funds or other mixed-use funds can be traded and used at the fund manager’s discretion as long as the funds are invested in to meet the funds set out objectives.
Where an exchange traded fund is different, is that the fund is set up and designed to mimic the performance of the index that it is tracking. As such, there is no ambiguity to where the money will be invested.
An example of how exchange traded funds work is the BetaShares FTSE RAFI Australia 200 ETF (QOZ) which is an exchange traded fund seeking to provide investment return that tracks the performance of the FTSE RAFI Australia 200 Index[1].
The fund itself has a market cap of $240.03 million and has delivered a 2.26% return to investors over the past 12 months. Now some people may say, well that is very underwhelming in comparison to some shares. However the key question is which shares? Did you pick them?
It needs to be remembered that at the time of writing this article on the 29th of April 2019, there was a significant drop in the global share market, in fact, the worst since the GFC of 2008 in the back end of 2018, with much of the profits generated by many companies disappeared. Not to mention the Royal Commission into the Banking, Insurance and Finance sector saw a massive hit on banking stocks, with some since rebounded.
The beauty of an exchange traded fund is that it provides the most adverse investors with options of where to put their money into a growth charged market, while minimising risk. If you put $10,000 30 years ago into an ASX 200 ETF, according to Fidelity International you would have $135,061 as of December 2018[2]. Although you take in the good and the bad, an exchange traded fund would provide similar type of returns for investors from all walks of life.
Don’t forget that sophisticated investors and high net worth individuals use exchange traded funds to hedge their portfolios and risk profile. They are very useful financial tools and available to be bought and sold through the ASX online brokers, allowing anyone to trade. As always, seek expert advice before doing anything with investing or exchange traded funds.
[1] https://www.marketindex.com.au/asx/qoz
[2] https://www.fidelity.com.au/insights/resources/adviser-resources/sharemarket-chart/a4-handout/
