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Using exchange traded funds to create options

20 November 2014  |  Investing

ETFsAchieving diversification is not easy for DIY investors if they confine themselves to the Australian context. Investing in the stock market means heavily concentrating on banks, a handful of oligopolies and other financial firms and miners. There are few manufacturing options and even fewer primary industry options.

One way to remedy that is exchange traded funds to invest directly in different areas. According to the AFR they are becoming more popular. Morningstar reports that in the September quarter, the value of Australian exchange-traded product assets grew by 10.6 per cent to $12.9 billion:

Commodities can play a valuable role in diversifying an investment portfolio, but the local equity market only begins to scratch the surface of what is available.

While Australian investors may believe they have adequate exposure to commodities, says BetaShares managing director Alex Vynokur, most resources companies listed on the ASX focus on bulk commodities, such as iron ore and copper.

An ETF such as BetaShares’ Commodity Basket offers exposure to 24 commodities including energy, agriculture, industrial metals, livestock and precious metals.

There are more than 20 commodity-related ETFs available to local investors. But just like investors choosing to buy direct equities, ETF investors looking for the right one need to do their research and understand all the variables that can be involved.

What contributes to the popularity of ETFs is the ease with which investors can buy them. Like any standard equity, a retail investor can simply type in a stock code and purchase within minutes.

“If you looked at all the share registries for the ETFs you would see a lot of SMSFs there, as in the designated owner, and probably a little over half of those would be SMSFs that don’t have a financial adviser [and are therefore incurring fewer fees],” says ETF Consulting managing director Tim Bradbury.

Buying a commodities ETF gives investors a very different exposure than a share in a listed company.

For someone wanting to invest in gold and buying into miner such as Kingsgate, considerations would include how the company is run, its costs and many other factors.

By contrast, says Bradbury, investing in a gold ETF removes the layer of corporate exposure.

“If you went and bought a direct investment in gold, that would have a whole bunch of fees that would entail finding someone to do the buying of the gold for you, plus you’d have to work out who would put it in a vault or store it for you,” he adds.

 

Such direct investment carries dangers, of course. If investors had invested in gold a couple of years ago when many were advising it because of widespread anxiety about the robustness of markets, they would have lost heavily.

But for diversification purposes, such ETFs can offer some options. The key is to have an investment philosophy and to remain consistent.

 

 

 



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