Have you considered exchange traded funds?

While you may have purchased shares on the ASX, have you considered purchasing an exchange traded fund (ETF)? ETFs are managed funds that can be bought and sold in the same way as listed shares. They blend the benefits of both managed funds and shares.

MANAGED FUND + SHARE = ETF

These types of investments have been around for more than two decades and are increasingly becoming a larger component of the overall investment universe.

By buying just one ETF, you can own a whole portfolio of international and/or local securities, providing a diversified exposure to an entire asset class in an efficient, simple and low-cost manner.

Essentially, the ETF is a structure designed to track a specific index by packaging up securities and making them available on the stock exchange as a single stock. ETFs reduce complexity as they provide diversification though one trade on the ASX.

An ETF also offers the benefit of liquidity; you can buy and sell units in the investment on the ASX during normal trading hours whether through your investment adviser, a broker or online. Like shares, pricing is daily and there is no minimum investment amount.

ETFs can provide exposures to stocks in individual countries, (eg Australian, US, Japanese or Chinese shares), asset classes (eg bonds, commodities, shares)  or sectors (eg healthcare, consumer staples or telecommunications) or broad global investment themes (Europe, Asia or emerging markets).

One key advantage of ETFs is that they can provide access to markets that were otherwise hard to access for individual investors. For example, in the bond market, the minimum investment size for some bonds is up to $500,000 and the market is not always very liquid. There are 11 fixed income ETFs listed on the ASX that provide access to these markets, with no minimum investment level and daily pricing so you can trade through the normal trading day.

The simplicity and ease of use of ETFs has led to them being used in a number of ways by Australian investors. Whilst they have been used to target specific exposures or play out particular investment themes, they have also been used as building blocks in portfolio construction.

They offer an efficient way to build a portfolio of Australian shares or to build an entire portfolio because they provide diversification across asset classes and international markets. Some investors have taken a blended approach and combined them with actively managed funds in their portfolios.

In Australia and overseas, investor adoption of ETFs has grown strongly. Over the past 20 years, exchange traded products (of which ETFs are the largest part) have grown into a $2.8 trillion investment industry globally. In Australia, the industry grew by 50 per cent and represented just over $15 billion in funds under management by the end of 2014, with 104 products listed on the ASX.

Source: BlackRock

To find out more about exchange traded funds, speak to Wynyard Park Private Wealth.