An exchange traded fund (ETF) is a basket of securities—such as stocks, bonds, currencies or commodities—that can be bought and sold in a single trade on an exchange. They generally track the performance of an index, less fees, and offer targeted exposure to a specific market segment, such as an asset class, geography, sector, or investment theme.
In essence, ETFs are funds that trade like stocks with the diversification benefits of managed funds. In one trade, they can offer diversified, low-cost, transparent and tax-efficient exposure to companies across the globe.
What are the benefits of ETFs?
Understanding the benefits of ETFs is an important step toward determining whether ETFs can be an appropriate choice for your portfolio.
ETFs generally track an index, offering exposure to a specific segment of the market such as:
Asset classes– ETF proliferation has helped make all market segments easy to access, from equities and fixed income, to commodities and alternatives.
Geographies– You can access global, regional, or single country focused ETFs, as well as ETFs that focus on developed or emerging markets.
Currencies– ETFs that track the price return of a basket of currencies, such as all emerging market currencies, or individual ones, such as the Japanese Yen or Chinese Yuan.
Sectors and Industries– These ETFs track a stock market sector or industry, such as Real Estate Investment Trusts (REITs), Resources, Financials, or Health Care.
Investment Themes– These ETFs seek to offer exposure to multi-generational investment themes such as Environmental Social Governance (ESG) or the advancement of technology on Cyber Security or Autonomic Vehicles.
Style/Factors– Smart beta ETFs offer exposures to stocks with attributes like low volatility, value and momentum.
Lower Expense Ratios
Because most ETFs are passively managed, they typically have lower management fees and operating expenses compared to managed funds. Transaction costs are minimised due to the low turnover of most ETFs and the indexes they track. When fees and expenses are low, investors can keep more of their returns.
ETFs provide one of the easiest ways to diversify a portfolio.
They provide access to many companies or investments in one single trade, removing single stock risk—the risk inherent in being exposed to just one company. Offering this exposure in the ETF structure helps to lower the risk that a select number of individual stocks could hurt overall portfolio performance.
ETFs benefit from two sources of liquidity:
Primary Market Liquidity– ETFs have a unique creation/redemption mechanism, which allows Authorised Participants (APs) to build baskets of ETF shares when demand increases (creation), or disassemble the baskets of ETF shares back into single securities should demand decrease (redemption). This happens in the primary market, and allows the liquidity of an ETF’s underlying securities to enhance the liquidity of the ETF.
Secondary Market Liquidity– Because they trade throughout the day on an exchange, or in the secondary market, investors can make timely investment decisions and quickly execute based on shifting market conditions.
ETFs are generally more tax efficient than other investment vehicles due to the ability to transfer securities in and out of the portfolio in the most tax-efficient manner, via the in-kind creation/redemption process. And, because ETFs generally track market indexes, turnover is generally low, resulting in fewer capital gains and lower taxes. Additionally, any associated capital gains taxes are paid at the time of final sale, offering greater control on the timing of tax consequences.
ETFs can be bought through an online brokerage account at their current market price, at any time during the trading day. There are no minimum holding periods, and investors can employ a wide range of trading techniques.
The holdings of most ETFs are fully transparent and available daily. This disclosure means investors know what they own at any moment, allowing them to make more informed investment decisions with greater accuracy.
There are risks associated with investing in ETFs. Before deciding whether to acquire or continue to hold an ETF you should read the product disclosure document for a full list of all risks.
The Global ETF Market
ETFs have grown exponentially since 1993 when State Street Global Advisors launched the SPDR® S&P 500 ETF Trust (SPY), the first US-listed ETF. Today, investors use ETFs to precisely meet their individual portfolio needs, from finding income and gaining broad market exposure, to lowering costs and investing in difficult-to-reach markets.
State Street Global Advisors launched the first US-listed ETF: SPDR® S&P 500 ETF Trust (SPY)
Total number of global exchange traded funds available. 1
An entity chosen by an ETF's sponsor to undertake the responsibility of obtaining the underlying assets needed to create an ETF. Authorised participants are typically large institutional organisations, such as market makers.
Creation and Redemption Process
The process whereby an ETF issuer takes in and disburses baskets of assets in exchange for the issuance or removal of new ETF shares.
An order placed with a broker to buy or sell a set number of shares at a specified price or better.
The degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Liquidity is characterised by a high level of trading activity.
The market where shares of an ETF are created or redeemed.
A market where investors purchase or sell securities or assets from or to other investors, rather than from issuing companies themselves. The Australian Securities Exchange is a secondary market.
Passively managed funds hold a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics.
Issued by State Street Global Advisors, Australia Services Limited (AFSL Number 274900, ABN 16 108 671 441) ("SSGA, ASL"). Registered office: Level 14, 420 George Street, Sydney, NSW 2000, Australia · Telephone: 612 9240-7600 · Web: www.ssga.com.
State Street Global Advisors, Australia Services Limited (ASL) (AFSL Number 274900, ABN 16 108 671 441) is the issuer of interests and the Responsible Entity for the ETFs which are Australian registered managed investment schemes quoted on the AQUA market of the ASX or listed on the ASX. This material is general information only and does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. You should seek professional advice and consider the product disclosure document, available at www.ssga.com/au, before deciding whether to acquire or continue to hold units in an ETF. This material should not be considered a solicitation to buy or sell a security. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF's net asset value. ETFs typically invest by sampling an index, holding a range of securities that, in the aggregate, approximates the full index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index. Investing involves risk including the risk of loss of principal. Diversification does not ensure a profit or guarantee against loss. Holdings and sectors shown are as of the date indicated and are subject to change. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future. Sector ETF products are also subject to sector risk and non-diversification risk, which generally results in greater price fluctuations than the overall market. SPDR and Standard & Poor's® S&P® indices are trademarks of Standard & Poor's Financial Services LLC and have been licensed for use by State Street Corporation. The Dow Jones Global Select Real Estate Securities Index is a product of S&P Dow Jones Indices LLC and has been licensed for use by State Street Global Advisors, ASL. MSCI indices, the property of MSCI, Inc. ("MSCI"), and ASX®, a registered trademark of ASX Operations Pty Limited, have been licensed for use by State Street Global Advisors, ASL. SPDR products are not sponsored, endorsed, sold or promoted by any of these entities and none of these entities bear any liability with respect to the ETFs or make any representation, warranty or condition regarding the advisability of buying, selling or holding units in the ETFs issued by State Street Global Advisors, ASL. State Street Global Advisors Trust Company (ARBN 619 273 817) is the trustee of, and the issuer of interests in, the SPDR® S&P 500® ETF Trust, an ETF registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 and principally listed and traded on NYSE Arca, Inc. under the symbol "SPY". State Street Global Advisors, ASL is the AQUA Product Issuer for the CHESS Depositary Interests (or "CDIs") which have been created over units in SPY and are quoted on the AQUA market of the ASX. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors, ASL's express written consent.