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Benefits and Uses of ETFs

Exchange traded funds (ETFs) can offer several benefits and uses: 

  • Access the performance of global markets with different ETFs; 
  • Invest confidently with the creators of the first US-listed and Australian-listed ETFs;
  • Achieve asset allocation with market-wide diversification benefits;
  • Benefit from ease of access, public market trading, and liquidity.
  • Explore many possible uses, such as:
    • long term investment for compound returns; 
    • in core-satellite portfolio strategies; 
    • to add market (beta) exposures to your portfolio;
    • easy regular investment plans;
    • for asset allocation, and 
    • to diversify your return and risk sources.

Key Benefits of ETFs


Access to desired exposure ETFs represent a basket of securities that can target a broad index such as the ASX 200, or a niche segment such as Australian Resources, depending on the specific exposure you want.

Simplicity to buy and sell Like stocks, ETFs can be bought through a brokerage account at their current market price anytime during the trading day.

Diversification ETFs spread investments across many individual securities, offering exposure to a range of asset classes, geographies, sectors, industries and investment themes, such as income and smart beta.

Transparency The holdings of most ETFs are fully transparent and available daily. This disclosure enables investors to make more informed portfolio decisions with greater accuracy.

Liquidity ETFs benefit from two sources of liquidity - the liquidity of the ETF shares themselves and the liquidity of the underlying holdings.

Lower cost ETFs often have lower costs and fees than comparable managed funds due to their lower overhead and staffing costs. You can retain more returns when costs are low1.

Hassle-free rebalancing Intraday liquidity enables ETFs to make the process of rebalancing quick and efficient. With ETFs, investors have the flexibility to get into or out of a position at any time throughout the day and respond to market movements.

Tax efficiency ETFs are generally more tax efficient than their managed fund counterparts. You can decide when to sell ETFs, and any associated capital gains taxes are paid at the time of final sale, offering greater control on the timing of tax consequences.


Uses of ETFs


  1. ETFs are ideal for implementing asset allocation across markets and sectors. 
  2. ETFs can be used for strategic asset allocation, for tactical approaches to asset allocation, and to implement core-satellite strategies.
  3. ETFs can be short-sold in risk management strategies, and can be deployed to maintain market exposures while making asset management transitions.

Investors use ETFs in a variety of ways: 

Asset Allocation

Savvy investors are discovering what institutional investors have known for some time, that asset allocation is an important driver of long term investment results. However, advanced asset allocation strategies have been difficult for many individual investors to implement, given the costs and investment size required to achieve more effective levels of diversification.

ETFs offer investors a sophisticated tool to efficiently gain exposure to broad market segments, encompassing a wide range of asset classes, equity market capitalisations and sectors. 

ETFs enable investors to build customised investment portfolios consistent with their financial needs, risk tolerance and investment horizon. It’s important to remember that diversification and asset allocation do not ensure a profit, or guarantee against loss. Three examples of asset allocation and ETFs include: strategic asset allocation, core-satellite strategies, and tactical asset allocation.

Sample Uses of ETFs in Asset Allocation Strategies: 

Strategic Asset Allocation: Research shows that strategic asset allocation is one of the most critical factors in explaining the difference in returns across portfolios.2 After investors decide what their long-term asset allocation will be—for example, equities vs. fixed income vs. commodities—they can then deploy SPDR ETFs, such as index fund ETFs, to build easily managed, low-cost portfolios that reflect the combined performance of the selected market indices.

Core-Satellite Strategy

Investors can also use ETFs to implement a core-satellite strategy. A core-satellite strategy seeks the broad market return as the “core” portion of a portfolio, and seeks additional diversification and returns in a “satellite” strategy that adds non-core market exposures.

Broad, market-based ETFs can be used as the core of an investment strategy. Sector, commodity-based, or other strategic or active ETFs can be used to add a cost-effective satellite portfolio to complement the “core” broad-market portfolio exposures. Such a strategy has the additional benefit of blending the general market risk of the core portfolio with the potentially riskier, or more concentrated satellite portfolio exposures.  

Tactical Asset Allocation

In today’s ever-changing macro and geo-political environment, investors often need to make real-time adjustments to their long term asset allocation to reflect changing views on short term asset class performance. They may also wish to deviate from long term asset allocation to take advantage of tactical, short term opportunities provided by the market. SPDR ETFs offer efficient tactical asset allocation where ease of trading and low costs support making tactical adjustments to portfolios. Tactical adjustments might include increasing allocations to markets and sectors that have become more attractive, or decreasing exposures to less attractive markets and sectors. Investors can also easily reverse these tactical moves once the opportunities and risks have run their course.

Exposure to Different Markets and Asset Classes

ETFs offer investors a sophisticated tool to gain exposure to broad market segments, encompassing a wide range of asset classes, equity market capitalisations and sectors. Investors can use SPDR ETFs to conveniently, efficiently, and affordably gain exposure to different markets through one transaction.

Source of Income

SPDR ETFs can offer a source of income from growth assets at a low cost. Structurally, SPDR ETFs invest in securities that generally correspond to a given index. That is, while the units trade like listed shares, they also benefit from the income streams of the underlying securities. The potential for low turnover (minimising capital gains) and overall cost-efficiency (typically a low management fee and operating costs) can make SPDR ETFs an attractive alternative for investors who want the potential for income from a growth asset class.

Short and Long Term Investment Vehicles

SPDR ETFs offer the opportunity to invest long term so as to maximise the compounding of returns.

The ease of trading in SPDR ETFs means investors can implement ongoing investment plans to build their positions over time with new capital, or to reinvest dividends.

Sales charges, entry/exit fees and high expenses can impact the performance of a portfolio over the long term. By using investment vehicles that have low management fees and adopting low turnover trading strategies, performance impact can be reduced. 


Insights


 

An ETF Due Diligence Checklist

Taking a simple checklist approach can help sort out the quality ETFs that best match portfolio needs.


More Information


Footnotes

1 Based on holding costs over time. Assumes that investors do not incur additional costs to themselves from brokerage fees and trading costs which arise when they trade in and out of an ETF.
2 Ibbotson, R. G. (2010). The importance of asset allocation. Financial Analysts Journal, 66(2), 18-20,1.