Choose Your Exchange Traded Fund Carefully: New ETF Research Will Help
Choose Your Exchange Traded Fund Carefully: New ETF Research Will Help
Competition is rapidly increasing in the global market for exchange traded funds (ETFs), with 109 firms now issuing them. In Australia, two new local issuers, Vanguard Investments Australia and Australian Index Investments, have launched ETFs in the past 12 months. Other issuers are expected to enter this market this year.
This is good news for investors and financial advisers as more competition creates greater product choice and helps the ETF market to grow, but it also means investors must look more closely at not just the ETF, but who is issuing it. Many investors mistakenly believe all ETFs are the same because they replicate an index. However, similar ETFs can have important differences, and the performance of the issuer is crucial.
It's not surprising, then, that rapid growth in the Australian exchange traded fund (ETF) market is being supported by the launch of specialist research on ASX-listed ETFs. Investment researcher, Morningstar Australasia, will issue ETF research reports in the next few months.
Much larger ETF markets, such as the United States, are analysed by many specialist ETF research firms, or ETF researchers within investment banks. In the US, for example, ETF investors can subscribe to services that produce research notes similar to stock reports, with buy or sell recommendations.
The Australian ETF market was boosted by the launch of Pennywise Investment last year, a specialist ETF research house run by Financial Review commentator and occasional ETF Investor columnist, David Bassanese. Morningstar's involvement takes Australian ETF research to a new level and, importantly, gets ETF information to financial advisers, share brokers and retail investors.
Additional research and the application of research-related tools, such as the Portfolio X-Ray tool, will help Australian investors identify duplication between stocks held directly in portfolios, and through ETFs.
As more financial planners based in Australia embrace ETFs, quality research can support their ETF recommendations.
One such area is assessing the strength of the product issuer. Some investors wrongly assume all ETF issuers are equal because ETFs simply replicate the price and yield performance of an underlying index. Assessing the ETF manager's record and ability to implement and execute efficiently will form part of the research along with other important aspects such as the level of tracking errors (when ETFs provide a return that is more or less than the underlying index), and liquidity.
There are now 109 ETF issuers worldwide as more firms try to capitalise on the booming global ETF market. Many are issuing ETFs for the first time, or are not well known in the ETF space. These firms may have limited history in ETF operational areas, or provide less customer support and education than large ETF issuers.
Investors should also consider the quality of the ETF issuer holding funds on their behalf through the ETF. Some of the larger and more established ETF issuers, have a wider range of 25 ASX-listed ETFs or exchange traded commodities (ETCs) for investors to select from.
The new research is also expected to analyse the structure of the index over which an ETF is based. This is to determine whether a particular index makes sense as an investment and if it is a good representation of a market for investors.
Traditional valuation metrics such as average PE ratios and dividend yields will also form part of the analysis.
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