Exchange Traded Funds (ETFs) and Exchange Traded Commodities (ETCs) are two of the fastest growing investments products in the world. Today there are approximately 30 ETFs / ETCs accessible through the ASX. A single trade in an ETF or an ETC can provide instant diversification to your portfolio.
What are ETFs and ETCs?
ETFs are open ended funds that invest in a basket of securities that make up an index i.e. they seek to replicate an index (e.g. ASX 200). ETCs also have an open ended structure and seek to track the price of a physical commodity or a basket of commodities giving investors direct exposure to the underlying asset.
Benefits of using ETFs or ETCs
- Buy / sell flexibility – ETFs and ETCs are traded on the Australian Stock Exchange and this means that you can buy and sell at any time during ASX’s trading hours, at prices that you specify. This means you can enter and exit an investment in ETFs and ETCs as quickly and as easily as shares and be assured of three day settlement.
- Low cost – as ETFs and ETCs are typically able to achieve lower operating costs, the management fees (commonly referred to as MERs – Management Expense Ratios) are significantly lower than other managed funds or the expense in holding physical commodities directly.
- Returns from capital appreciation and income – an ETF or ETC will change in value as the underlying portfolio of assets changes in value. This can provide for investors through distributions. Investors may also enhance after tax returns from franking credits.
- Fair value – ETFs and ETCs are designed to ensure that they trade close to their underlying value. This provides the investor with certainty that the on-market price will closely reflect the value of the underlying assets held in the fund. This is commonly referred to as trading at net asset value (NAV).
- Taxation advantages – the turnover of the underlying portfolio tends to be low with ETFs changing only when there is a rebalance of the index. This means that the level of capital gains tax that needs to be paid by the fund and its investors can be greatly reduced.
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