4 May 2017

5 questions to ask your adviser about ETFs

More and more investors are looking at ETFs and wondering if they should incorporate them in their portfolios. Talking to your financial advisers about ETFs is a good start. 

Exchange traded funds (ETFs) have joined managed funds and individual shares as mainstream investment tools, and their popularity is only growing. The past year saw record flows into shares and fixed income ETFs. Today, one in four global investors owns ETFs and half of all investors plan to purchase them in the next 12 months.

Whether you’re already an ETF investor or have just been hearing about them, you may be curious to know more or understand them better. This is a great conversation to have with your financial adviser.

Here are five questions (and brief answers) to help you get started.

1. What’s the difference between an ETF and a managed fund?

ETFs and managed funds have a lot in common: They’re both diversified, managed bundles of securities that are divided into shares, and bought and sold by investors. ETFs are traded on an exchange just like a share and usually track an index; however, they’re also structured somewhat differently. These features mean they’re typically cheaper to own than managed funds, through lower annual management fees. EFTs are also highly liquid and can be bought and sold during a trading day. With holdings published as often as daily, ETFs are transparent, so you always know exactly what you own.

2. How do I use ETFs?

A key feature of ETFs is their versatility. The top ways investors use them are to increase diversification, and gain exposures to broad market indexes and specific sectors. What’s more, because there’s an ETF for almost any market sliver you can think of, many investors also look to ETFs as replacements for individual shares and managed funds.

3. How might ETFs fit into an overall portfolio?

Think of ETFs as yet another powerful investment tool at your disposal, alongside managed funds and other vehicles. As just one example, ETFs could be a cost effective way to build a diversified core portfolio, combined with actively managed funds or a direct share portfolio that target specific outcomes or manager skills. It’s ultimately about what you hope to achieve as an investor and getting the best value for your money.

4. Aren’t these risky?

Investors often use ETFs to mitigate risks in their portfolios through diversification. However, like managed funds, they carry similar market risks to their underlying securities so they’ll be subject to forces such as interest rate changes, geopolitics and industry trends. So when you’re thinking about risk, it’s important not to shoot the messenger. It’s also important to know that ETFs aren’t exotic instruments: they operate within a well-functioning, well-tested infrastructure with a lot of oversight.

5. Are ETFs trading vehicles or buy-and-hold investments?

The answer is yes. You can easily trade them in your brokerage account just as you would a share, making it easy to express a short-term market conviction. However, there might be an even stronger case for ETFs long term, namely in the cost savings, which can really compound over time. Of course, the “right” way to build a portfolio depends on your particular goals. As more and more people turn to ETFs for a variety of uses, the best way to find out how they could work for you is to ask.