The rapidly growing popularity of exchange traded funds (ETFs) is providing an international flavour to many portfolios. ETFs can provide exposure to global market indexes and international currency as well as international market sectors and fixed income products.
An estimated $21 billion is now invested in the almost 140 exchange traded funds (ETFs) in Australia, up 25 per cent in the last 18 months. Investment in global equity ETF products (41.8 per cent) is slightly ahead of Australian equity ETF products (38.1 per cent), according to figures from February.
An ETF is a marketable security that tracks an index, a commodity or bond. It trades like a common stock on a stock exchange and is a simple, liquid, transparent, low cost and flexible investment product. It’s important to know that the popularity of ETFs has spawned a number of similar products that operate differently. A true ETF generally tracks a specific benchmark. It publishes its holdings regularly, is usually passive. It’s also physically backed, that is it holds the underlying securities as opposed to a synthetic ETF, which gets its exposure through a derivative.
Then there are other things like exchanged traded managed products. They’re some of the newer products which, in some cases, are actively managed and may not publish their holdings or track a benchmark. Technically they are not ETFs, even though broadly they all fit into the same category.
The simplicity of ETFs and the range of international markets covered provide a host of options for portfolios from an investment in an index, or exposure to a whole country, to investing in a specific sector such as global healthcare. In this way, ETFs can be used to fill gaps in portfolios, improve diversity and manage portfolio risk. In one of the more recent innovations, investors can now get access to global fixed income.
The simplicity of ETFs to build portfolios gives a broad access to a diversified return to global markets. The Australian market performed very well up until recently, but what we’re seeing over recent times is that the Australian equity market hasn’t been performing quite as well as some other markets around the world. But, to some extent, investors don’t need to worry quite so much as they may have done in the past, simply because they have access to those markets through ETFs.
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