ETF stands for Exchange Traded Fund and is shorthand for a parcel of securities (usually shares or bonds) that are traded in the same way as a single stock.
In other words, it’s a simple way to own a portfolio of securities rather than a single one.
For decades, retail investors seeking to construct a portfolio of shares or any other asset class were forced to purchase those shares individually or look to unlisted managed funds. Now ETFs are able to fill that void and allow investors to quickly and easily provide exposure to diverse portfolios of stocks, bonds and other asset classes via a single investment on a public exchange such as the ASX or Chi-X.
In recent times, the role of Exchange Traded Funds has continued to grow as ETFs offer lower trading costs and greater flexibility compared to traditional managed funds.
An important recent development in Australia is the development of Active ETFs. Active ETFs are a type of ETF where the portfolio is actively managed by a team of professional fund managers (as opposed to replicating an index, more on that below). At eInvest we focus only on Active ETFs, but think it is important to understand how ETFs work more broadly.
In this article, we may use the generic term “ETF” to refer to both passive ETFs and Active ETFs.
How do ETFs work?
ETFs are created by the ETF provider but it is you, the unitholder or investor, who ultimately owns the underlying assets. The provider designs a fund and then sells units in that fund to investors that are tradeable the same way shares of a company are traded on the exchange.
ETFs are structured similarly to unlisted managed funds.. They are also similar in that both issue product disclosure statements that layout their investment objectives, investment methodology, fees and expenses and other essential information investors need to know.
What are Active Exchange Traded Funds (ETFs)?
Active ETFs differentiate themselves from the original index-replicating ETFs by being actively managed, usually because they are not following a specific index. They are sometimes also known as Exchange traded Managed Funds (ETMFs).
There are now more than ten active ETFs based in Australia distributed by well-known organisations which include eInvest.
The managers of active ETFs choose which stocks to buy but their fees are still low in comparison with the brokerage costs of buying individual shares.
Why we prefer active ETFs
The goal of an active ETF is to outperform an index or certain benchmark. Active ETFs rely on the skill and ability of experienced portfolio managers to ideally outperform those benchmarks.
As such, active ETFs are also able to focus on a wide variety of investment strategies and can offer a greater level of diversification for investors looking to reduce their overall market risk.
For many years in Australia, ETFs were closely linked to passive investing. In Australia and much of the world, passive ETFs made up the majority of ETFs. However, since 2015, the role of active ETFs in Australia has started to grow rapidly after legislative changes around portfolio disclosure changed, opening up a whole new world of opportunity for investors.
Disclaimer: Please note that these are the views of Camilla Love, MD of eInvest, and is not financial advice. To find out how to invest in our active ETFs, visit here. The product disclosure statement and more can be found at www.einvest.com.au To find out how to invest in our active ETFs, visit here. The product disclosure statement and more can be found at www.einvest.com.au
