Etf Trading Tips (part 1)

Exchange traded funds (or ETFs) are among the fastest growing financial products in Australia

. An ETF can be bought and sold on the ASX just like an ordinary company share, and offers indexed exposure to a range of domestic and international benchmark equity indices at relatively low cost.

The State Street SPDR S&P/ASX 200 ETF for example, trades with the ticker code STW, and offers exposure to the Australian S&P/ASX 200 index at an annual management fee of only .286%. There is now also a range of Australian-based sector ETFs available, covering the resources, metals and mining sector, financials, industrials, and energy sector.

And there are a range of international ETFs covering the United States, Europe, Japan, non-Japan Asia and the emerging markets.

Australian ETF assets now exceed $A3 billion, a 180% increase on 2008. Local ETF trading activity increased by 51% during 2009.

ETFs are increasingly popular because they offer the flexibility and liquidity of a listed stock, and the simplicity, transparency, cost effectiveness and tax efficiency of a low turnover indexed fund.

And unlike listed investment companies, they are structured so as to trade quite closely to their net-asset value. Essentially, professional market makers are engaged to supply/buy ETFs from the market at prices close to net-asset value.

So if the S&P/ASX 200 index rises by 15% in a given year, you can be pretty sure the relevant ETF (STW) will rise by virtually the same amount.

By diversifying away company level risk, ETFs allow SMSF trsutees to pursue either a simple "buy on hold" strategy quite cheaply, or more actively rotate between asset classes and/or equity sectors based on top-down macro-economic analysis. SMSF trustees can in effect now run their own total return equity based "hedge fund" should they so wish.

That said, ETFs are relatively new to the market and still not well understood. What follows in Part 2 of this article is a list of trading tips to help self managed super fund trustees wanting to get involved with these types of investments.

David Bassanese is Managing Director of ETF researcher, PennyWise Investment. If you would like a free four-week trial of PennyWise ETF Investment Research, please consult www.pennywiseinvestment.com.au

Important note: While every care has been taken in the preparation of this document, Webfriends Pty Ltd trading as PennyWise Investment (ABN 11 117 305 629) (AFSL 329 027) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts.

by: Graham Parkes

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