What is an ETF?

ETFs are investment funds that track an index, commodity or basket of assets like an index fund but trades like a stock on an exchange. Most track the index of a country or particular industry however some track baskets of stocks, bonds or currency. An ETC (Exchange Traded Commodity) tracks commodities.

ETFs and ETCs are two of the fastest growing investment products in the world and there are over 50 accessible through the ASX.

They have a number of attractive features, most notably easy diversification and instant exposure to overseas markets. Some notable examples are VTS (Vanguard broad coverage of the US market), IEM (MSCI Emerging markets ETF), USD (Betashares US Dollar ETf) and STW (SPDR S&P/ASX 200 Fund). ETFs have emerged as an innovative and low cost investment vehicle for the diversified investor looking to explore domestic and foreign indices, currency and commodities.

What are the benefits of ETFs?

A single ETF trade delivers instant exposure to a diversified portfolio of securites, this can be broad coverage, such as OZR - the SPDR ASX200 Resources Fund, or narrow like ILC - the iShares S&P/ASX 20. They are also a less inexpensive way to gain exposure to overseas portfolios than traditional managed funds, and less brokerage costs than purchasing large numbers of individual shares.

ETFs are highly transparent, meaning the fund holdings and NAV (Net Asset Value) are published and available daily for investors to verify exactly what they own. Management fee disclosure is also upfront. Since ETFs are bought and sold like a share and priced throughout the day they can be bought on margin and restricted with limit and stop orders.

How do I trade ETFs?

ETFs are bought and sold just like equities, except that they trade on the warrant market. They are open-ended funds, meaning the number of units offered is not fixed but can increase or decrease in response to demand. You can enter and exit an ETF investment as you would a share and be assured of 2 day settlement.

State One Stockbroking offers full service and non-advisory dealing in the growing number of ETFs listed on the ASX. The brokerage terms for ETFs are the same competitive terms as offered for equities. Before trading in ETFs, each State One client is required to read the Warrant Agreement Booklet (click here), then sign the Warrant Agreement Form (click here), to confirm that they understand the potential risks associated with this type of investment vehicle and submit it to State One Stockbroking. Clients should understand that quoted prices for ETFs do not always mirror their underlying Net Asset Value (NAV) and the volume of ETFs traded may be variable.

What are the costs?

Management fees are typically low since a passive management strategy essentially tracks an established index or commodity price. Brokerage fees are equal to dealing in equities.