When speaking to advisers about ETFs, there seems to be a view from some advisers that ETFs are purely tools for timing current market conditions. I would like to take some time in this blog post to hopefully dispel this idea.
It is understandable that some may view an ETF as purely a tool for short term trading. They’re liquid, transparent and, thanks to the increase in product development, now offer investors access to asset classes or country exposures in a single trade. However, on the flip side, these very same characteristics explain why advisers can use ETFs as a core, long term position in client portfolios.
We rarely hear from investors that they don’t want to buy the bank shares because ‘it’s not the right time’ or won’t invest in a broad market unlisted equity index fund because the ‘market has already run too hard’. The reason is, if you buy the bank shares, you are hoping that there will be some capital growth over time, but more importantly, you are expecting to receive what has historically been a reasonable dividend stream and franking credits which can be particularly beneficial for investors within certain tax paying thresholds. The basis for including the broad market unlisted equity index fund in a portfolio is the view that the investor wants exposure to a diverse range of stocks and sectors in one holding compared to having to buy hundreds of individual stocks to achieve the same outcome.
An ETF, depending on the underlying exposure, can be a way for investors to implement a diversified, core equity exposure, like an index fund AND offers access to liquidity, dividends and franking like any share. At the end of the day, the ETF combines the benefits of holding shares and unlisted managed funds, and investors should consider using them in the same way.
I like to remind potential investors and their advisers that an ETF is a vehicle to access certain asset classes and exposures. If the view on this asset class or exposure is that it suits a short term tactical trade – by all means go for it, however it’s important to recognise that an ETF can be used more broadly. Having an ETF as a lower cost, diversified core holding could be another way to go for investment portfolios.