QAG: FUM Warning

If an ETF has a small amount of funds under management or FUM (meaning, the amount of money invested in the ETF), it risks being closed by the fund manager.

Here at Best ETFs Australia, we consider any ETF with less than $100 million invested to be a higher than normal risk of being closed. However, there are many variables to consider:

• Is it a lower-cost ETF (under 0.5% in yearly management fees)? If so, it'll need more FUM to be profitable.
• Is the ETF issuer a major provider of ETFs? If they are not 'one of the big guys', the ETF department could be closed if it fails to become profitable.

It's important to remember that if an ETF closes, the ETF investor will typically receive a notification from the ETF issuer and can elect to sell the ETF prior to its closing, or opt to receive his or her money back from the ETF after it closes.

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Commodities sector

The Best ETFs Australia commodities sector includes ETFs which invest in:

• Gold - physically-backed or synthetic
• Platinum - physically-backed or synthetic
• Silver - physically-backed or synthetic
• Other precious metals
• Oil & energy

Synthetic vs. Physically-backed

Typically, "Synthetic ETFs" are commodity ETFs which provide investors with exposure to an asset class (e.g. gold prices) but they do not own the underlying asset (gold bars). They do this with derivative contracts.

"Physically-backed" ETFs have arrangements in place (including storage, safe storage and insurance) to physically own the underlying asset (e.g. gold bars). You will find information on where and who holds the gold, as well as some key risks associated with the arrangement, in the ETF's product disclosure statement (PDS).

What's better?

It depends on the ETF, asset class and arrangements in place. Typically, physically-backed ETFs are considered safer because they have a claim on the underlying assets.

What exactly does Commodities invest in?

QAG aims to track the performance of the S&P GSCI Agriculture Enhanced Select Index Excess Return (hedged into AUD) which comprises the four most significant agricultural commodities on a global production basis: corn, soybeans, sugar and wheat. It does so by investing its assets in cash and is paid the performance of the Index by a counterparty via ‘swap’ agreements with one or more financial institutions.

Sector risks

When you invest in commodities (like gold, silver or oil), some academic studies show you may be lowering some of the risks in a diversified portfolio. For example, you won’t have all of your eggs in your ‘Australia basket’.

However, our emphasis is on the some. Investors considering investing a meaningful amount of money in commodities should strongly consider getting expert financial advice before making an investment decision.

Factually speaking, some of these risks to commodities include:

• Market/price risk - we believe predicting the price of gold, oil and other commodities with certainty is impossible. If you choose to invest in a commodity ETF you must accept that the value of your investment could be significantly influenced by factors outside of your control, including political, regulatory and financial risks; and gold production and demand risks, to name a few. Often, the price of some commodities will move higher with global uncertainty. However, there are no guarantees this will happen in the future.
• Sovereign/regulatory risks – governments and regulators throughout the world can change their policies on inflation, trade, investing, taxes and even the rights of people and investors. Australia has a very stable and robust financial, legal, political and societal system — many countries don’t.
• Supply of commodities - supply and demand for gold, silver, platinum and oil can work for you or against you. Prices are often influenced by investor demand, competing uses for the commodity (e.g. jewellery, LNG) and macroeconomic factors (e.g. inflation, US interest rates). Supply can be impacted by miners' exploration and production success and large financial institutions (e.g. investment banks and central banks).
• Liquidity risk – if we experience a shortage of commodities and spike in demand there's a chance the price of a commodity could jump but the price of the ETF (inside your share brokerage account) could rise even higher. This would create a situation in which you, the investor, could overpay for the actual commodity which will be bought by the ETF issuer.
• Synthetic exposure - many commodity ETFs will NOT physically own or store a commodity (e.g. oil) on behalf of its investors. Instead, they'll use derivative contracts to get you exposure to the commodity. This can create significant risks such as counterparty risk (see below) and delivery risk. Make sure you read the PDS of the ETF you're considering before you invest. The PDS will tell you where the commodity is -- or isn't -- stored. The PDS should be available on the ETF issuer's website.
• Counterparty risk  & holding structure – some ETF issuers use complicated holding structures to get you exposure to the underlying investment overseas. In Australia, ASX-listed shares and ETFs use the same system to ‘settle’ transactions and ‘hold’ your ETFs in your name, it’s called the CHESS system. However, if the ETF invests in overseas assets and commodities, it’s likely those assets will be held using another system or holding structure governed by other rules. Rest assured there are some safeguards in place. However, you should always do your research, read the ETF’s PDS or consult a licensed financial adviser. Is your commodity ETF insured against loss or theft?
• FX/currency risks – A big reason many investors put their money overseas is to get exposure to another country’s currency. For example, if you invest 1 AUD into US Dollars at a currency exchange rate of 1.00, you will get 1 USD in return. If the USD gets stronger (meaning the Aussie dollar exchange rate falls), your 1 USD is now worth more! However, it can go in the opposite direction. For example, if the AUD-USD goes to 1.10, your 1 USD (bought at a lower exchange rate) is now worth less in AUD terms than before. This risk is the reason why some ETFs are currency ‘hedged’ — to avoid the impact of currency fluctuations.

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What you need to know about BetaShares

BetaShares is one of Australia's largest ETF issuers, by number of ETFs issued on the ASX. At the end of 2018, Betashares had $6.1 billion of money invested in its ETFs.

BetaShares was founded in Sydney by a group of finance professionals who have a venture capital (VC) business called Apex Capital Partners. BetaShares was an 'in house' investment for Apex but grew quickly as ETFs took off.

Betashares is part-owned by Mirae Asset Global Investment Group, a specialist ETF business which manages nearly $130 billion.

$6b+ invested in BetaShares ETFs

BetaShares launched its first ETF in 2010 but has grown its ETF count rapidly to have around 50 ETFs in the market today.

BetaShares has issued index fund ETFs, rules-based ETFs and actively managed funds in an ETF wrapper. To launch its active funds, BetaShares teamed up with Legg Mason and AMP.

Potential allocation for QAG

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 QAG used for?

The BetaShares QAG ETF could be used by investors to take a view on the future prices of food or to diversify a portfolio with agricultural commodities. Agricultural commodities are predominantly used in the production of foodstuff, drinks and textiles, and more recently in the production of bio-fuel.

How do I invest in the Agriculture ETF-Currency Hedged (Synthetic) 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 QAG 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.