April 2002 Volume 83 Number 4 "serving the protectors"
Shares
By Ruth McCance, ASX Investor Education

Buying managed funds on ASX

Have you been interested in managed funds but are a little unsure how to buy and sell them? You can now buy and sell units in managed funds through the ASX like any other type of share. These are known as Exchange Traded Funds (ETFs). These funds have been popular in the US and European markets for several years but have only recently been introduced into Australia.

So what is an ETF? An ETF is a security that combines some of the characteristics of a share with some of the characteristics of a managed fund. Just like a share, you can invest in companies listed on the ASX and like a share you can invest in ETFs through your stockbroker. The difference though is that when you invest in an ETF you are not investing in one company but rather a number of companies listed on the share market at the same time. This is because an ETF is made up of a number of companies. So, for example, an ETF based on the ASX 50 will consist of all the companies that make up the S&P/ASX 50 index.

Because an ETF is made up of companies in the index it means that returns will greatly match the changes in the share market index being tracked.

We already have listed managed funds in the form of listed investment companies, of which the two largest and best known are Argo Investments and Australian Foundation Company. But with these, the share price can swing around the actual value of the shares owned by the company. This happens because the share price is affected by market demand for the shares. This means that the share can cost either more or less than the actual value of assets held per share.

By contrast, the advantage of ETFs is that the price of the units (as they are called, not shares) much more closely matches the value of the assets per share in that fund. The way they are structured means they are not affected by market demand. In other words, if the unit price of the unlisted managed fund is $1.20, then the price of the listed unit in the same managed fund should be very close to $1.20.

So why would you want to consider investing in ETFs? Like many managed funds, ETFs offer the ability to diversify your investment. By investing in ETFs, you are exposing yourself to a number of different companies.

The great thing about ETFs is that they are easily tradable. Just like shares, investors are able to buy and sell units throughout the day. This makes trading in ETFs quick and easy.

ETFs are also a cost-effective type of investment. If you are investing in managed funds or unit trusts there are often a range of fees that you will have to pay. For example, you may find yourself paying entry fees, a sales commission for the adviser that recommends you invest in the fund, an ongoing management fee to the fund, an ongoing commission to the adviser that recommended you the fund and an exit fee may be applicable in some cases when you wish to redeem your money.

In contrast, when you invest in ETFs you will pay two types of fees. Just like shares, the first fee you pay will be brokerage to your stockbroker. The second fee will be an ongoing management fee, which you can expect to be lower than the management fee you would pay in the more traditional managed funds or unit trusts mentioned above.

There are benefits to both ETFs and traditional managed funds. You will need to speak to your stockbroker to decide which of the options is better for you. For instance, if you want to trickle money into a fund in lots of $100 or $200, even the minimum brokerage may work out more than the entry fees for traditional managed funds, which may make unlisted funds the better option.

Other potential drawbacks about ETFs include the limited choice (five at the moment, though there is every intention to expand the range). You may be interested in using managed funds to invest into a particular niche or sector, which ETFs won’t let you do at the moment.

However, given the rapidly rising interest in ETFs overseas, this will be one to watch on the market here.

This article was prepared with the assistance of the ASX Investor Education unit. It is not intended as investment advice or as a recommendation of specific securities. For more information, phone ASX Customer service on 1300 300 279 or go to the ASX website: asx.com.au

This article contains general information only. It is not intended as and must not be relied upon as investment advice. You should consult a licensed professional advisor prior to making any investment decision.

The information contained in this article is provided in good faith and derived from sources believed to be accurate as at the date of publication. However, no warranty of accuracy or reliability as to such information is given. Australian Stock Exchange Limited and its associated and related companies will not be liable for any loss or damage arising in any way from or in connection with anything provided in or omitted from this article or from any action taken or inaction in reliance on the article. This article does not contain an invitation or offer to invest in securities or other financial products and nothing in this article is to be taken as ASX endorsing promoting or expressing any opinion on any securities or other financial products.

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