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How to be an investor in the ETF and managed fund worlds

ETFS and managed funds can give your investing a global reach.

ETFS and managed funds can give your investing a global reach. Photo: TND

Do you look longingly at the returns big investors make on global markets and wonder why you’re not seeing the same number of zeroes?

Don’t despair – it is actually possible to have a broad investment reach on the Australian Securities Exchange, too.

The first thing to do is to get your head around some of the lingo and your options.

The New Daily has you covered.

Available for you to invest in on the ASX are a few different types of funds, including exchange traded funds (ETFs), listed investment companies (LICs), listed property trusts (AREITS) and managed funds (mfunds).

These investments give you access to a wider range of investment possibilities by allowing you to purchase units in a range of stocks rather than just a single one.

In short: More options while spreading the risk.

Let’s look at the fund types for a moment. AREITS are well known and invest in different property types, generally in Australia.

They include big names like Goodman, Scentre and Vicinity and they give you access to commercial and industrial real estate.

LICs are a long established sector with funds like AFIC and Argo, giving you investments across the ASX. They buy and sell stock hoping to deliver investors a better return than the stocks they invest in.

If you are interested in these keep an eye on their net asset backing as sometimes their shares trade below the net worth of their investments, giving you the chance of an easy profit.

You can find their asset backing if you call them up on the ASX’s website or an online broking site and go into the research section.

Mfunds and ETFs are similar, but mfunds charge higher fees, are usually actively managed rather than following an index, and allow investors to buy or sell units without paying extra brokerage.

Be warned that buying and selling can come with a fee.

ETF…WTF?

ETFs are an increasingly popular investment because they are cheap to hold and they offer an increasingly wide choice of asset baskets. There is $121.4 billion invested in Australian ETFS, about 20 per cent more than 18 months ago.

They are good for novice investors because their managers keep an eye on the individual investments they hold, freeing the investor from that burden.

Think of an ETF like putting a bit of money in bunch of buckets.

Normally, if you had your money in just one bucket and it fell over, all hte money would tip out. But if you have multiple buckets, you’re protected when one of the buckets falls over.

In other words, ETFs are a simple way to gain diversification.

“The benefit of diversification is that it is going to give you a smoother return that you would get investing in a few large companies,” said James McFall, principal of Yield Financial Planning.

ETFs essentially mimic the whole stock market or sectors of it. Rather than pick stocks, their managers buy indexes relating to particular sectors or a range of stocks that fit the classification they choose.

You can buy an ETF that holds, say, the top 200 Australian shares, the US S&P 500 or particular segments of the market.

You can even choose themes that fit with your philosophy such as ethical funds or those choosing to invest, say, in metals necessary to build renewable energy infrastructure.

“You can increasingly get exposure to individual themes using ETFs,” said Roger Montgomery, principal of Montgomery Investment Management.

“It could be oil or health care or technology or even cyber security ETFs in the US.”

Do some research

You can buy both Australian and many offshore ETFs simply by going through an online broker. Lists of local ETFs are available on the ASX websites and sites like those of Morningstar.

An ETF is not, however, a magic formula for success.

“Your investment principles don’t change when you use an ETF however,” Mr McFall said.

“You need to look at the types of ETFs on offer and think about your own risk tolerance, current asset allocation and be mindful of spreading your investments across different asset classes.”

That means for the average person don’t put all your ETF eggs in one asset basket.

If you are buying more than one ETF it makes sense to make sure they cover different asset classes to make sure you don’t finish up with too much exposure to risky areas like technology.

So also research to see what level of dividend an ETF is paying and see whether it is in a high-growth sector or a more steady-as-she-goes classification.

Get a sense of the level of risk and think about how those factors sit with you before you make a decision to buy.

You should also do some research to see what sorts of assets are behind the ETF you choose to buy, particularly if it is a new offering or in an investment area you are unfamiliar with.

“Be wary of the fact that the issuers of these ETFs are not doing it out of altruism – they are doing it to generate a fee,” Mr Mongomery said.

“As a result they tend to launch things that are popular at the time.”

“So you want to be investing in a theme that is unpopular or when investing overall is unpopular.”

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