I recall a meeting I had with a financial planner roughly three years ago responding to my question of ‘How familiar are you with ETFs?’ with ‘I’m a financial planner, I don’t need an EFTPOS terminal. Thank you!’ Oh, how times have changed.
In my day to day role as one of BetaShares’ Business Development Managers I travel around the country speaking to financial advisers, institutional clients and retail investors. In these travels, there has been a marked change in the types of conversations I’m having regarding ETFs. I’ve noticed that the conversations I’m having have changed from people simply not knowing what ETFs are to more nuanced conversations around the potential benefits and uses of ETFs in portfolios. One topic that comes up a fair bit is whether advising on, or investing in ETFs is in “competition” with direct equities and managed fund holdings. From my experience in dealings with clients who are successfully using all three investment products, this is certainly not the case. In this post I’d like to outline the similarities and differences between ETFs, shares and managed funds.
Traditionally, Australian investors who wanted exposure to the Big 4 banks and Telstra would just buy the shares on the ASX. In five trades, the investor would own the shares and receive the dividends and franking benefits. Without doubt, such activity is still prevalent amongst some of our clients who continue to be avid stock pickers and have adequate access to stock research and analysis. But take the example of a client who doesn’t know, nor want to predict which are the best stocks to buy, but still wants to be invested in the banks? Here is where an ETF may help. By investing in an ETF that tracks the performance of the major financial stocks, an investor who has a view that the Financials sector will be the next money maker can easily and simply obtain exposure to the entire sector in one trade and still receive the dividends and franking from the underlying companies.
Managed funds are the other primary investment tool used by investors. The concept here is to invest money by buying into a fund, where the fund manager has the knowledge, experience and research to pick the best stocks on an investor’s behalf. This selection of stocks is packaged up in a unitised structure, allowing an investor to, should they wish, “set and forget”. Without doubt, if you find a high performing fund manager, this can be an efficient option. However, there is no guarantee that the fund will outperform the benchmark each and every year in which case the fees you’re paying could be better spent elsewhere. Clients and investors that invest in managed funds can combine such funds with ETFs to lower the cost of the portfolio (as ETF fees are typically substantially lower than those charged by managed funds), and also add an index element to their investments. This passive exposure will mean that for those periods that the managed fund does not outperform the benchmark there will at least be exposure to a fund that IS tracking the benchmark.
The point I’d like to leave you with is that you don’t need to consider investing in ETFs, shares and managed funds as an “either/or”. ETFs are flexible tools that can be used in a variety of ways to add value to investor’s portfolios when used in conjunction with other investment vehicles. Examples include to increase portfolio diversification, lower portfolio cost or to allow access to certain markets or strategies that have been previously difficult or costly to access.