With the global exchange traded fund industry now larger than hedge funds (>US$3T – yes, that’s a “T”!), and our own little market recently crossing the A$20B mark, these investment funds are seriously “going places”!
… and they still have a long way to go.
A new investor looking at exchange traded funds may find themselves spoiled for choice, with the number of products constantly growing and the product choice always evolving. So I’ve decided to write a series of posts, which I’ll publish over the coming weeks, to help explain what they are about and how they might fit into your portfolio. Or if you don’t have a portfolio – these can be a start. Just call me Dr. ETF!
The purpose of the Dr. ETF posts is to provide you with some examples of the strategies that can be accessed via exchange traded funds. Of course, we are not giving personal investment advice as we do not know your individual financial situation. Before investing, you should make sure you fully understand the products, their benefits and risks.
Why exchange traded funds?
Exchange traded funds give you cost-effective exposure to asset classes and investment strategies. If you want exposure to shares, fixed income, currency or commodities there’s probably an exchange traded fund for you.
Why are exchange traded funds so popular?
- Low cost
- Liquid (able to be traded on the ASX during the day)
- Trade via a broker, and within one share trade you have instant exposure to an asset class or investment strategy.
There are many ways to use exchange traded funds, depending on how sophisticated you want your investment portfolio to be and your style of investing. With that said, let’s get into it! In this first post I’ll respond to a few “questions” posted that relate to those with interest in Australian shares, and, in particular, will discuss:
- A core long term position
- A geared solutions for those who are more adventurous
EXPOSURE TO AUSTRALIAN SHARES
“Dr. ETF, I want exposure to Australian stocks. I am in a position where I can tie my money up for 5-7 years, which I hear is the right sort of time frame when thinking about investing in stocks. I’m not looking for anything too saucy, but I’m happy to try and be a little smarter than the average vegemite about how I put my money to work. Any thoughts?
– Gourmet Vanilla
The BetaShares FTSE RAFI Australia 200 ETF (ASX Ticker: QOZ) sounds like it might be worth a look. This product may well be suitable as a core holding for long term exposure to Australian shares.
QOZ offers exposure to the top 200 largest stocks in Australia. Stocks are weighted according to their economic relevance (we use cash flow, sales, dividends, book value) rather than market cap (shares x price). This subtle but clever twist over traditional index funds helps the fund by design systematically sell securities that have exceeded their economic value and invest more into undervalued securities.
The fund delivers dividends, franking credits that come from the underlying share exposure and has potential to outperform comparable market cap weighted index funds over the long term, due to its nifty weighting technique.
EXPERIENCED AND LOOKING FOR MORE
“Dr. ETF, I want exposure to Australian stocks! But not a standard portfolio, I want leverage!… But without margin calls. (I can handle ups and downs, but I don’t want to reach into my pocket just because the market falls!).
Is there a way to make some of the money I have available to invest in stocks work harder than can be expected from mere mortal stock portfolios!
Dr, you know from my physical that I have a strong constitution, experience in the share market and, as such, can handle the bumpy ride of a leveraged portfolio. I think that in the long term stocks will do well, certainly better than the cost of funding. Is there anything out there for me?”
– Strong Constitution
Dear Strong Constitution,
The BetaShares Geared Australian Equity Fund (hedge fund) (ASX Ticker: GEAR) could well be right up your alley.
The Fund combines funds received from investors with borrowed funds and invests the proceeds in a broadly diversified share portfolio consisting of the largest 200 securities on the S&P/ASX 200 by market capitalization.
Note the Fund ‘combines funds received from investors with borrowed funds’ – the gearing ratio, which is what you will want to be very interested in, will be managed between 50—65%. Gearing ratio is the total amount borrowed as a percentage of total assets. The Fund manager has organized funding and there is no risk of margin calls to investors.
When the market goes up 1%, GEAR is engineered to go up some 2% – 2.8%, before fees and expenses. Of course, if the market goes down, GEAR can be expected to go down to the same tune.
Please note: Gearing magnifies gains and losses and may not be a suitable strategy for all investors. Investors in geared strategies should be willing to accept higher levels of investment volatility and potentially large moves (both up and down) in the value of their investment. Investors should seek professional financial advice before investing, and monitor their investment actively. Note that GEAR does not track a published benchmark and past performance is not an indication of future performance.