Some people have given up the volatility of shares to simply trade ETFs. Photo: Louise Kennerley
Two weeks ago I was telling you that investors who wanted a diversified portfolio in a particular asset class without having to manage it themselves could buy Listed Investment Companies (LICs) on the ASX.
This week we are going to look at something conceptually similar, Exchange Trade Funds (ETFs). Like LICs, ETFs are traded on the ASX. That means you can buy and sell them just like LICs and shares.
But there are some major differences between LICs and ETFs. The main one is that, by comparison, the LIC market is a rather small domestic Australian affair, while the ETF sector is the plaything of the much bigger international investing community.
For instance, there are just under 60 Listed Investment Companies on the ASX with a total market capitalisation of around $23 billion, with the three biggest (AFIC, Argo and Milton) accounting for 57 per cent. But up the big end of town there are around 100 ASX-listed ETFs with a market capitalisation of $160 billion.
While the LIC market represents the Australian listings of mostly Australian fund manager offerings, they are of almost no interest to anyone outside Australia. The ETF market, on the other hand, represents the ASX listings of much larger internationally traded ETFs that have tiny exposures to Australia, if any, and are of interest globally. And that’s just the ones listed on the ASX. The global ETF market is 10 times the size with over 1500 ETFs on issue worth close to US$2.4 trillion. Only some are listed here.
The biggest is the MSCI EAFE ETF with a market cap of $41.5 billion. It invests in global large and midcap equities outside the US and Canada, so is used not by Australian SMSF investors looking for a diversified domestic portfolio but by international, mostly US, institutional and private investors looking for exposure outside the US.
The next biggest with a market cap of $23 billion is the iShares Core S&P 500 ETF, which invests in large capitalisation US equities.
Of the 100 or so ETFs listed in Australia there are (just) 10 broad-based Australian ETFs and 11 Australian sector ETFs that are only worth around $4 billion, or just 2.6 per cent of all the listed ETFs in Australia.
The bulk of the ETF offering on the ASX is made up of 23 international ETFs instead, ETFs which offer ASX listed exposure to MSCI (Morgan Stanley Capital Index) country indices as well as exposures to the S&P 500, the Russell 2000, Emerging Markets, Japan, US small caps, China, South Korea, Taiwan, Hong Kong, Europe and Singapore, to name the biggest. There are also three international sector ETFs covering the healthcare, telecoms and consumer staple sectors (accounting for 1.2 per cent of the sector), three currency exposure ETFs (0.1 per cent of the sector), 22 commodity exposure ETFs (3.3 per cent), 11 cash and fixed income ETFs (0.3 per cent) and 11 ”Domestic and International Strategy Focused” ETFs (0.6 per cent of the sector) which includes an “Australian equities bear hedge fund”.
A number of new breed ETFs include a ”Dividend”, ”High Dividend”, ”Top 20 Australian Yield Maximiser”, ”High Yield”, ”Value” and ”Select High Dividend Yield” fund, all of which pander to the Australian ”safe income” theme and have only been listed for a couple of years.
Apart from Betashares, who have 12 ETFs, other issuers include iShares with 26, Vanguard with 10, State Street SPDRs with 14, EFT Securities with 15 commodity-based ETFs, and Russell Investments with five Australian funds. Try their websites to see their products. There is a lot more to cover on ETFs, for instance, some are ‘Conventional’ and some are ‘Synthetic’. There are different risks with both. Liquidity is often an issue although some are so highly traded there is no issue.
The good thing about ETFs is that they all trade in exactly the same way as any other shares on the ASX. So you don’t have to change anything, just find out their codes and what they represent. Some people have given up the volatility of shares to simply trade ETFs.
It’s a lot easier making a few decisions each year about which country, sector and currency than it is managing the volatility, decision making and paperwork on 20 separate equities.
If you liked LICs, have a look at ETFs. There are more of them, they cover more exposures and they allow you to do man-in-the-moon investing rather than Australian tunnel-vision investing.
On top of that, the management expense ratios (fees) range from 0.07 per cent to 0.7 per cent for the big ones, rather than the 2 per cent-plus you can get charged in unlisted managed funds. Of course, you’ll be paying a commission in and out. Then there’s the spread. Then there’s the premium or discount to NTA. It all adds up again.
This article sounds like a sales pitch, but it’s more of a heads up, it’s not all glory in ETFs, but it may be worth a narrow-focused Australian investor educating themselves about them, at worst it’ll make a change from waiting for the bull market. Not everything is on the equity cycle. Have fun.
Marcus Padley is the author of the stock market newsletter Marcus Today.
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This story Administrator ready to work first appeared on Nanjing Night Net.