As every modern day citizen can well attest, we’ve experienced real advancements over recent years. Technology is one area, for example – with the iPhone being a classic example: you now have access to multiple services such as connecting with your loved ones for a video chat, accessing almost every song ever recorded, monitoring your spending and checking the weather in Santorini, all on one device that fits in your pocket. The world of investing is no different. The wealth management industry has also experienced major advancements, including the rise and rise of Exchange Traded Products. With 216 Exchange Traded Products (ETPs) (as at September 2017) now trading on our own Australian Securities Exchange (ASX) I thought I’d take the time to help investors understand some of the acronyms pervasive in our industry.
1. Exchange Traded Product (ETP):
ETP is not really a term of art, but rather an umbrella term for a collection of financial products traded on the stock exchange i.e.- Exchange Traded Funds (ETF), Active ETFs etc. What these investments have in common is that they are traded intra-day which means investors can usually transact at live prices for their particular ETP at any one point during market hours. Secondly, they are open-ended, which means the number of units on issue is not fixed and can increase or decrease in response to demand and supply across the market.
ETPs come in many shapes and sizes, allowing an investor to get exposure to a variety of different asset classes and strategies, from single commodities to broad sharemarket indices. Like any investment, it’s important to know exactly what ETP you are invested in and how you get the exposure.
2. Exchange Traded Fund (ETF):
ETFs are one of the more popular forms of ETPs. The key defining characteristic of an ETF is that it must aim to passively track a published index (like the Nasdaq 100) or asset class (like physical gold bullion).
An ETF’s primary investment objective is to provide returns that closely track the returns of a basket of assets (or an asset class), less any fees and other costs, rather than attempting to outperform the return of that pre-defined index. There are many advantages of using ETFs, as they are cost effective exposures that are simple, transparent (all holdings are published daily), liquid and can give you instant diversification in a single trade.
An example of an ETF is the BetaShares Nasdaq 100 ETF (ASX Ticker: NDQ), which aims to track the price and income performance of the NASDQ-100 Index (before fees and expenses). NDQ gives Australian investors access to many of the world’s most innovative companies that continue to revolutionise our everyday lives including Apple, Facebook, Amazon and Google, in a single ASX trade.
3. Exchange Traded Managed Fund:
In many ways, Exchange Traded Managed Funds and ETFs look and feel very similar. The key difference of this type of fund compared to an ETF is, as the name suggests, an Exchange Traded Managed Fund is managed by a fund manager instead of tracking an index. Like ETFs, they are open ended structures and have full portfolio transparency daily.
To date, most of these funds are utilising rules-based strategies to generate particular investment outcomes, such as generating additional income or managing risk. An example of an Exchange Traded Managed Fund is BetaShares Australian Top 20 Equity Yield Maximiser Fund (managed fund) (ASX Code: YMAX). YMAX is a simple to use, cost-effective tool that allows investors to implement an equity income investment strategy. YMAX follows a systematic “rules based” approach in implementing a buy-write strategy over the S&P/ASX 20 Index. The fund’s strategy means that its performance can be expected to differ from that of the S&P/ASX 20 Index.
4. Active ETFs
Active ETFs are actively managed funds that aim to outperform the market or a particular pre-set benchmark. They are essentially exchange traded versions of traditional, actively managed funds and differ from ETFs and Exchange Traded Managed Funds in that they typically do not disclose their portfolio holdings daily (but rather less frequently such as quarterly with a 2 month delay).
Active ETFs are structured in the same way as traditional managed funds, but differ in that they provide live intra-day pricing through an iNAV (or indicative net asset value), with the fund acting as market maker by providing live bids and offers on the ASX to provide liquidity for investors. As with other ETPs, investors in Active ETFs benefit from having to complete relatively less paperwork than unlisted funds, with trading conducted through a broker or online trading services during the day.
Investors in Active ETFs also have more transparency of pricing due to the publication of a frequent iNAV, which means investors have a reference point to assess the value at which they are trading during the day, instead of having to accept a default end-of-day closing price for their transaction, as is the case with an unlisted managed fund.
BetaShares and AMP Capital have joined forces to deliver investors a range of Active ETFs – combining AMP Capital’s strength in active investment management and BetaShares’ expertise in exchange traded funds. An example of such an Active ETF is AMP Capital Global Property Securities Fund (Unhedged) (Managed Fund) (ASX Code RENT). RENT provides exposure to an actively managed portfolio of global property securities and real estate investment trusts (REITs).
Hopefully these definitions help you in understanding the different types of popular exchange traded investment exposures and in getting to grips with a few more of the financial terms used in our market.