The ASX Investment Products report for June 2019 shows ASX exchange-traded funds (ETFs) have reached a total worth of more than $50 billion.
What Is An ETF?
Exchange traded funds, or ETFs, are investment funds that are listed on the stock exchange (e.g. ASX, NASDAQ, NYSE). They can be managed funds or index funds, or in other words, active or passive, and the fees are usually lower than an unlisted investment fund.
ETFs give an investor exposure to many different shares or assets with a single purchase, offering one of the quickest and easiest methods of achieving diversification.
ASX ETF Growth
ASX-listed ETFs hit the milestone of a $50 billion invested in June 2019 with growth of 30.1% over the last 12 months.
According to the ASX Investment Products report, there are now 198 ETFs listed on the ASX, and the average daily transaction value is more than $200 million.
BetaShares offers the largest range, with 46 different ETFs listed. Some other large providers include iShares and Vanguard.
Why Choose ETFs?
ETFs can be utilised for several different reasons. For example, an active investor may choose to buy individual shares, but when it comes to bonds exposure, it’s usually easier to purchase a bonds ETF than it is to buy individual bonds.
Passive investors may avoid buying individual shares and just stick to buying and holding ETFs long-term. This can be an effective way of gaining exposure to the share market while lessening the risk of individual shares performing poorly.
Another option, and the way I use ETFs, is as the core of a portfolio. In other words, an investor may choose to put most of their funds in ETFs, say 50% to 75%, and then invest the remaining funds in high-conviction share ideas that will hopefully boost the overall return of the portfolio.
This ETF might be used as part of a 'core' allocation in a diversified long-term portfolio because of its diversified and transparent investment strategy, low costs, risk profile and the expectation of long-term returns.
What is The Core-Satellite Approach?
A core-satellite approach puts investments into two 'buckets' depending on the expected risk and returns.
Bucket 1: Core Investments
The 'core' is the larger part of an investment portfolio and could be reserved for more conservative investments. For example, this might include diversified, low-cost and easy to understand funds, bonds, shares or ETFs.
If you're new to investing, the core is a good place to start.
Core ETFs might include:
- Australian shares (index strategies)
- Australian bonds and global bonds
Bucket 2: Satellite/Tactical Investments
The 'satellite' or tactical bucket is the smaller part of a portfolio (e.g. 0% to 30% of your entire portfolio). In this section, investors might decide to take more risk, invest in unique or unproven strategies, buy fast-growing individual shares, etc.
Tactical strategies could be higher risk, higher cost and more complicated strategies that are used in the hope of outperforming the averages (e.g. ASX 200, S&P 500, etc.).
Tactical ETFs might include:
- Australian shares (rules-based strategies)
- Global shares (rules-based strategies)
- Commodity ETFs
- Currency ETFs
- Cash ETFs
- Hedge funds
No matter how you choose to use ETFs, they’re becoming an increasingly important part of most investors’ portfolios, and it’s worth considering how an ETF could fit with yours.
Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.