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Active ETFs Red Scales

What is an active ETF?

Sometimes it seems that no sooner have investors worked out what one product is, than another comes along. But don’t despair: Active ETFs are an important recent innovation that most particularly allow Australian investors to get access to portfolios of carefully chosen investments at surprisingly reasonable fees.

What are Exchange Traded Funds (ETFs)?

Exchange Traded Funds (ETFs) are already well known and have picked up an impressive market share in Australia since about 2012. They are baskets of shares designed to follow an index, say the ASX200, which take a lot of the complication out of building up a diversified investment portfolio.

They gained sharply in popularity once the Future of Financial Advice legislation came in in 2012. To put it politely, what followed was a great increase in the popularity of financial products that didn’t  pay commissions to advisors.

From just over 70 assorted ETFs in 2012, we now have more than 230 Exchange Traded Products listed on the ASX worth around $37 billion.

The fees for global ETFs are slightly higher than domestically focussed ETFs, which keep their costs down by being what is called “passive”.

In other words, passive funds don’t choose stocks, they merely replicate the stocks that make up an index.

 

What are Active Exchange Traded Funds (ETFs)?

Active ETFs differentiate themselves from the original index-replicating ETFs by being actively managed, usually because they are not following a specific index.

That’s because most of them have a global focus, which makes them harder to benchmark against a specific index. They are sometimes also known as Exchange traded Managed Funds (ETMFs).

There are now more than ten active ETFs based in Australia distributed by well-known organisations such as Vanguard, Magellan, Platinum, BetaShares, Challenger, Einvest and Montgomery.

ASX estimates there are probably 22 ETFs on issue that have active characteristics, of which about half are domestically focused.

The managers of active ETFs choose which stocks to buy but their fees are still low in comparison with the costs of buying individual shares, which is the only serious alternative for investors who want to hold a diversified spread of investments.

 

How do you get started?

Speak with a financial adviser. The ASX also publishes lists of ETFs you can choose from.

After that you can visit the website of the ETF distributor for more information, usually contained in a PDS (Product Disclosure Statement). The PDS will make clear whether the fund is active or passive, and what its charges are.

Buying and selling ETFs is no more complex a process than buying shares. You can choose a traditional “full service” stockbroker although it’s just as easy to open an account with one of the discount stockbrokers such as nabTrade, Commsec or BellDirect.

Given that ETFs exist because they save investors money, it makes sense to go with a discount broker. They will give you a HIN (Holder Identification Number) which means you can sell the ETF through another broker if you would like to do so.

It’s that simple.

 

For more detail, please see the relevant Product Disclosure Statement (PDS) for the active ETF you are interested in. This article is the opinion of the author and is not financial advice. Speak to your financial advisor or broker for more information. I’m sure they’ll be happy to help you.