ISO ETF report

iShares ISO ETF (ASX:ISO)

The iShares ISO ETF provides exposure to 200 small cap Australian shares. This is a low-cost way to access small Australian companies through a single fund.

This free report is issued by Best ETFs Australia, a division of The Rask Group Pty Ltd. It is not a recommendation. Speak to a financial professional before relying on this information and please read our Financial Services Guide (FSG).

ISO ETF Fast Facts

Australian shares sector

Index strategy

Issuer: iShares


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iShares ISO ETF (ASX:ISO) key information

Ticker code: ISO Exchange: ASX Yearly fee: See ETF list
Geography: Australia Sector: Australian shares Distribution frequency: Half yearly
DRP: Full or partial Domicile: Australia Issuer: iShares
Registry: Computershare ISIN code: AU000000ISO9 IRESS code: ISO

ISO: Liquidity Warning

Sometimes, ETFs and funds will invest in assets or asset classes that are difficult to transact in. When something is difficult -- or impossible -- to buy and sell quickly (e.g. in one or two days) and at a fair price, we say that it is an "illiquid" investment.

Illiquid investments include some bond ETFs and funds, small-cap ETFs and funds, physical commodities, property, venture capital, and other ETFs and funds which invest internationally.

For an extreme example, imagine an ETF that invests in physical residential property in Australia. It's very difficult to buy and sell a physical property quickly, for a good price. However, an ETF can be bought and sold every day on the stock market. This mismatch would create a big liquidity problem because there's no way an ETF could buy or sell a property multiple times each day.

If such an ETF was proposed it's likely that the price of the ETF (what you see in your brokerage account) and the actual value of the properties inside the ETF (commonly referred to as the "net asset value" or NAV) would severely 'dislocate' or deviate from one another. For example, the ETF's share price could be $15 but the NAV (value of the properties that one ETF share represents) could be $10. If an investor bought the ETF, they would be over-paying for the assets by 50%. As you can see, it would create issues for investors.

Of course, that's an extreme example to illustrate our point about liquidity. However, please note that during the Global Financial Crisis of 2008/2009 the prices of some US-listed bond ETFs 'dislocated' from their true value by as much as 15%!

Here are some of the risks to consider when investing in an ETF which could present liquidity issues:

  • Use a "limit order" in your brokerage account, rather than a 'market order'. Market orders can bounce up and down during the trading day whereas a limit order sets a limit on the price you pay (before you do anything, check your brokerage firm's terms and conditions and call them if you're confused about how they place orders!). If an ETF is illiquid, the price could bounce around more significantly than other, more liquid ETFs.
  • Avoid buying and selling these ETFs during market turmoil or high volatility. We believe this is the most likely time you will see a dislocation between prices and the NAV. Try to place your limit order during the trading day when activity should be at its highest, rather than setting the order in advance or overnight.
  • Study the buy-sell spread of the ETF on our website or on the ETF issuer's website. Most illiquid ETFs have wider buy-sell spreads. As a reminder, while it's not a 'cost' you pay to the ETF provider/issuer, the spread is an indirect expense that an investor has to pay to get in or out of the ETF. The lower the better.

One final note we'll add for an illiquid ETF is that some ETF issuers can provide exposure to the asset class by using derivatives and not actually "physically" owning the assets that you expect them to own. These ETFs will have some language in the PDS which tells you if they are allowed to use derivatives. It's common for some bond ETFs and small-cap ETFs to use futures contracts (a type of derivative) instead of owning all of the assets inside the ETF.

  • Full replication: This means the ETF buys everything in the index it claims to track.
  • Partial replication: Typically, this means the ETF can use derivatives or other ways of providing 'most' or 'all' of the expected returns of the index. For example, instead of owning all 300 shares inside the ASX 300 share market index, it might own the largest 200 and then own a smaller part of the remaining 100 or use a derivative contract.
  • Synthetic ETFs: usually applied to commodity ETFs, this means the ETF or fund does not physically own or store the commodities but uses a contract/derivative over the index (e.g. it does not own actual oil barrels in a warehouse)

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Australian shares sector

The Best ETFs Australian shares sector includes ETFs, managed funds and index funds which cover the ASX and national stock exchange (NSX). It also includes other sharemarket-focused ETFs and funds which may hold investments overseas (e.g. via the New Zealand or US exchanges).

Performance Characteristics

Over the ultra-long-term, the Australian share market has proven to be among the best-performing in the world. We truly are 'the lucky country'.

One of the unique features of the Australian sharemarket is a willingness by companies to pay substantial dividends back to shareholders. We believe this may be a result of Franking Credits.

What exactly does Australian shares invest in?

The ISO ETF aims to track the performance of the S&P/ASX Small Ordinaries Accumulation Index, which is made up of companies included in the ASX 300 index but not the ASX 100 index. ISO moves away from shares of the largest companies on the ASX and instead holds companies numbered 101 to 300 by market capitalisation (a measure of company size). You could buy all of these companies yourself using a share brokerage account, but that would be a very expensive and time-consuming process.

Sector risks

The Australian sharemarket is heavily skewed towards financials (i.e. banks and insurers), resources and property. These companies tend to be 'cyclical', meaning they move in-line with the direction of the broader economy and financial markets.

Some risks to investing in this sector include:

  • Market risk: This is the risk that the performance of the ETF/fund rises or falls unexpectedly day-to-day, month-to-month or even year-to-year. We believe these price movements are unpredictable. Therefore, we believe investing for multiple years is the most prudent way to invest.
  • Home country bias: That happens when you invest a larger amount of your money in local/Australian investments and exclude overseas markets. This may be because it is 'too difficult' or 'too complex' to invest in overseas markets.
  • Concentration: The Australian share market is made up of many companies. However, traditional market indices have a very high proportion of their performance tied to just a few investments, such as blue-chip shares in the financial and resources sectors.
  • Regulatory risk: Australia is a market with a robust financial system. Changes to the rules or laws regarding public investments could alter the performance of ETFs and funds in the sector.

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What you need to know about iShares

BlackRock is the company responsible for the huge issuer of ETFs called iShares. It is one of Australia's and the world's largest ETF issuers, both in terms of the number of ETFs issued and the money invested, known as Funds Under Management or FUM.

iShares have issued ETFs in Australia for more than a decade and currently operate over 30 ETFs listed on the ASX spanning local and global shares, local and global bonds, and cash. iShares also offers rules-based ETFs.

Potential allocation for ISO

This ETF might be used as part of a 'tactical' or 'satellite' allocation in a diversified long-term portfolio because of its unique strategy, costs, risk-reward 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
  • Cash

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

Typically, what is ISO used for?

The iShares ISO ETF could be used by investors to get exposure to a broad basket of smaller Australian listed companies, which are likely to grow their profits over time. Navigating away from the largest ASX companies removes a lot of the exposure to the financial sector and could diversify your Australian portfolio allocation.

How do I invest in the S&P/ASX Small Ordinaries ETF ETF?

The easiest way to buy an ETF is through your online share brokerage account. Just search for the ticker code and buy it. The following podcast explains how to buy shares and ETFs for the first time.

Meaning, you can follow the exact same process for ETFs as you do for shares -- both can be purchased in one account.

Australian Investing 101

Don't have a brokerage account for ETFs?

Read our tutorial on understanding how share brokerage accounts work.

Is ISO a good ETF?

We believe that knowing whether or not to invest in an ETF requires a lot of research, even for an ETF like this one. ETFs are long-term investments, so it's important to do the right amount of research into the ETF before you invest, and consider how it fits with your risk profile, strategy and the other investments in your portfolio.

Where you can go to find more research on this ETF:

Reports like this one on the Best ETFs Australia website were built to help you understand ETFs and to provide free access to news and research across all Australian ETFs, index funds and selected managed funds.

This report is the free version of our ETF reserach and it contains general information and should not be considered as a recommendation or personal financial advice. If you want to receive personal financial advice and have someone tailor the ETF research to you, you should speak to a financial adviser.

If you don't want to pay a financial adviser, here's what you can do:

  • Before doing anything, you should always read the ETF's Product Disclosure Statement (PDS), which should be available on the ETF provider/issuer's website. The PDS explains some of the risks, the fees and other important information.

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Disclaimer: Any information contained in this report is limited to general financial advice/information only. The information should not be relied upon because it has not taken into account your specific needs, goals or objectives. Please, consult with a licenced and trusted financial adviser before acting on the information. Past performance is no guarantee of future performance. Nothing in this article should be considered a guarantee. Investing is risky and can result in capital loss. By reading this website, you acknowledge this warning, having read our Financial Services Guide (FSG) and agree to our terms & conditions available here. This article is authorised by Owen Raszkiewicz of The Rask Group Pty Ltd.

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