Investing In ETFs: A Simplified Guide

Exchange Traded Funds (ETFs) offer an affordable way to invest in a basket of assets. ETFs are as easy as investing in stocks on the ASX.

They are like a “mixed bag” of stocks, bonds, or commodities, allowing you to diversify your portfolio with a single purchase.

How They Work:

  • Buy and sell on exchanges: Similar to buying shares, you can trade ETFs through a stockbroker.
  • Underlying assets: You don’t own the individual investments directly, but rather units representing a portion of the ETF’s holdings.

Types of ETFs:

  • Passive Funds: These track a specific index or asset and its performance. For example, if the S&P/ASX 200 has risen 10% over a year, in theory so will the S&P/ASX 200 ETF, less fees.
  • Actively Managed: Managers attempt to outperform the market through active trading strategies.
  • Physically-backed: Investing in all or a sample of the underlying assets.
  • Synthetic: Using derivatives to mimic the performance of the underlying asset.

Investment Options:

ETFs cover a wide range of assets, including the following:

  • Australian and international shares.
  • Specific sectors (e.g. mining, technology).
  • Fixed-income investments (e.g. bonds).
  • Commodities and precious metals.
  • Foreign currency funds.
  • Hedged and unhedged funds.
  • Diversified funds – across multiple asset classes.

Pros and Cons of ETFs:

Pros:

Cons:

  • Market risk: The value of the ETF fluctuates with the underlying market or sector.
  • Currency risk: Investments in international assets are subject to currency fluctuations if unhedged.
  • Liquidity risk: Some ETFs may hold less liquid assets. Rendering it more challenging to buy or sell units at certain times.
  • Tracking error: The ETF’s return may deviate from the intended index or asset.

Getting Started:

  • Compare ETFs: Research different options and compare their performance, fees, and risks.
  • Is capital growth or passive income required?
  • Choose a broker: Open an account with a stockbroker to buy and sell ETFs.
  • Consider your risk, time frame, and investment objectives.
  • Consult your financial adviser.
  • Start investing: Place your orders and diversify your portfolio with ETFs.

Compare the Price and NAV or iNAV

You can assess if an ETF is fairly priced by comparing its price on the ASX or Cboe with the NAV (net asset value) or the iNAV (indicative or intraday net asset value).

  • NAV: This is calculated by taking the total value of the fund’s assets, subtracting liabilities, and dividing by the number of outstanding units at the end of the trading day.
  • iNAV: This is a real-time estimate of the NAV, updated throughout the trading day.

Here’s how you can find the NAV and iNAV:

  • ASX: ETF providers publish the NAV on the ASX website at the end of each trading day.
  • ETF provider website: Most ETF providers also publish the NAV and iNAV on their websites.

Why compare price to NAV or iNAV?

The price of an ETF should be close to its NAV or iNAV. However, sometimes, the price may deviate due to factors like:

  • Market volatility: During periods of high market activity, the price of an ETF may temporarily move away from its NAV.
  • Trading costs: Bid-ask spreads and brokerage fees can also contribute to a difference between the price and NAV.

Additional resources:

  • Product disclosure statement (PDS): This document provides detailed information about an ETF, including its investment objectives, fees, and risks. Read the PDS carefully before investing.
  • Financial advisor: If you have any questions about ETFs, consider consulting a financial advisor for personalized guidance.
  • ETF FAQs.
  • Golden Rules For Investing In ETFs.

 

 

Disclaimer

Data shown on Comparisons of EFTs is sourced by JustStocks employees from the websites of EFT providers, individual Product Disclosure Statements, and historical price data information. JustStocks. All rights reserved. JustStocks does not guarantee the data or content contained herein to be accurate, complete, or timely.

JustStocks provides data and commentary that constitutes general information only. This does not constitute personal financial or professional advice or assistance. The data and information compiled do not consider your investment objectives or your financial circumstances. JustStocks cannot guarantee this website’s accuracy, completeness, or timeliness. JustStocks accepts no responsibility regarding any inaccuracy, omission, or change in information or articles or the data provided. The information published on this site/page should not be relied upon as a substitute for personal financial or professional advice. The information provided may not be appropriate for your circumstances or needs. JustStocks recommends that you seek professional advice from a qualified advisor before you make any decisions.

 

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