Exchange Traded Funds (ETFs)
1. What are ETFs?
2. Who is involved in the ETF transaction?
3. Types of ETFs available
What are ETFs?
Exchange Traded Funds (ETFs) are pooled investments that are listed on the stock exchange. ETFs have low minimum investment amounts but buying just one unit offers diversification to small investors. Diversity can be by strategy, geographic locations, asset class and sector or size of companies. Some ETFs have thousands of investments.
ETFs can be passive and follow an underlying index closely or actively managed where the portfolio manager aims to outperform an index.
Typically, ETFs disclose all of their holdings so can be much more transparent compared to other managed funds. Fees are also low.
The first ETF was launched in the US in the 1990s.
Australian ETF issuer, BetaShares in its Australian ETF Review, found the industry ended July 2021 at a fresh all-time high of $118.8B total market cap. Industry growth over the 12 months was 77%, representing absolute growth of $51.6B over the period.
As at 15 November 2021, the ASX lists 199 ETFs and the Chi-X two.
Who is involved in an ETF transaction?
There are six parties involved in an ETF transaction:
- ETF Issuer – The company that issues the ETF. Some of the issuers in the Australian market include: BetaShares, Vanguard, iShares and VanEck.
- ETF Market Maker – The market maker buys and sells ETF units to make sure there is enough to satisfy demand. They can create and redeem units which ensures ETF prices trade close to the net asset vale (NAV) of the fund. Market makers include: Citi Group and Morgan Stanley.
- ETF Custodian – The custodian holds the investments for the benefit of the investors and is a separate entity to the ETF issuer. The structure makes sure investors risk is confined to the ETF’s investments and there is no exposure to the issuer. An example of a custodian is Perpetual Corporate Trust.
- ETF Index Provider – Index providers track the prices of securities on a daily basis. They calculate returns over set periods and rebalance regularly. Two well known index providers are S&P and MSCI.
- An Exchange – ETFs need an electronic exchange. In Australia there are two exchanges, the ASX and Chi-X.
- The Investor
Types of ETFs available