ASX Exchange Traded Funds (ETFs) & Exchange Traded Commodities (ETCs)

1 December 2010

What are ETFs and ETCs?

ETFs and ETCs invest in a portfolio of securities, which may include Australian shares, international shares, commodities, listed property trusts, or a combination of asset classes and can provide you with a diversified portfolio in the one transaction.

Why trade ETFs and ETCs?

ETFs and ETCs provide investors with the ability to establish a diversified portfolio easily and cost effectively through a single security. ETFs and ETCs can be used to create a diversified portfolio or to complement an existing portfolio.

Benefits of using ETFs or ETCs

  • Buy / sell flexibility – ETFs and ETCs are traded on the Australian Stock Exchange and this means that you can buy and sell at any time during ASX’s trading hours, at prices that you specify. This means you can enter and exit an investment in ETFs and ETCs as quickly and as easily as shares and be assured of three day settlement.
  • Low cost – as ETFs and ETCs are typically able to achieve lower operating costs, the management fees (commonly referred to as MERs – Management Expense Ratios)  are significantly lower than other managed funds or the expense in holding physical commodities directly.
  • Returns from capital appreciation and income –  an ETF or ETC will change in value as the underlying portfolio of assets changes in value. This can provide for investors through distributions. Investors may also enhance after tax returns from franking credits.
  • Fair value – ETFs and ETCs are designed to ensure that they trade close to their underlying value. This provides the investor with certainty that the on-market price will closely reflect the value of the underlying assets held in the fund. This is commonly referred to as trading at net asset value (NAV).
  • Taxation advantages – the turnover of the underlying portfolio tends to be low with ETFs changing only when there is a rebalance of the index. This means that the level of capital gains tax that needs to be paid by the fund and its investors can be  greatly reduced.

Types of ETFs and ETCs

There are different types of ETFs available on ASX covering Australian, International indices and sector specific indices.  There is also a range of ETCs available covering precious metals.

  • Australian ETFs
  • International ETFs
  • Commodity ETCs
  • Sector ETFs

Investing

Investing in ETFs or ETCs is easy as they trade in exactly the same was as any other share on the Australian Stock Exchange.

Four of the major providers that have ETFs and ETCs on issue on the Australian Stock Exchange, include  Australian Index Investments (Aii) , iShares, Russell Investments, State Street Global Advisers (SSgA) and Vanguard Investments.

Risks of using ETFs and ETCs

Like all investment products, ETFs and ETCs carry risks. These can include market risk,  tracking risk and potentially currency risk.  You should obtain independent financial advice from a professional adviser prior to making any financial decision.

For more information, go to ASX Fact Sheet.

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