An exchange traded fund (ETF) is a security that tracks an index, sector, commodity, or another asset(s). ETFs can be traded on a stock exchange just like regular stocks. ETFs are a growing space in the ASX market, with new products coming live to offer exposure to new types of assets as their popularity increases. ETFs provide the flexibility to invest in a particular thematic, product or region. This provides a platform for different investing approaches, one of which could be more tailored to your specific process or risk profile.
There are several types of ETFs:
There are ASX listed ETFs, these are a few examples that Maqro has covered in the past:
ETFs Popularity has been on the rise globally over the past decade, not just globally but also in Australia – the funds under management (FUM) of ETF providers has risen by 47.0% since the start of 2020.
The company providing an ETF normally physically owns the underlying assets and designs a product that tracks their performance. They do this by buying the underlying asset and creating a fund, of which shares can then be bought by investors on the market. These shares are what can be bought and sold on the exchange.
However, some ETFs are known as synthetic, which means that they do not necessarily own the underlying asset but use derivatives to track the underlying index. These derivatives tend to involve using swap contracts, which could expose investors to counterparty risk. Counterparty risk is the chance that a party in a contractual agreement may default on their obligation.
Nonetheless, in both tracking methods the market price of a share in an ETF will usually closely align to the net asset value, that is, the value of the underlying asset/s the ETF is tracking. Any divergence between these values is short lived under the principle of market efficiency. If this divergence persists the tracking error can be a useful metric to consider.
There are a number of advantages in ETF investing:
Although ETFs provide a number of benefits on various fronts, there are still some things to take note of.
At Maqro Capital, our ETF division specialises in analysing and recommending ETF products. The ETF universe is growing, and we believe that there is an ETF for almost all investing strategies. ETFs also allow investors to explore new markets that were once beyond reach and in turn broaden horizons regarding new strategies.
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