A- A A+

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.




Similar articles from Investing

How overseas markets are faring

 | 11/25/2014

WorldWith the All Ords turning into a dividend play, DIY investors seeking for capital gains should at least look at overseas equity markets. So what is happening?

Will Murray put bank shares under pressure?

 | 11/24/2014

David MurrayThe David Murray inquiry into the financial system is tipped to ask the banks to retain more capital. Some are tipping it may lead to weaker share prices. It may also reduce the profits available for dividends.

Central banks are 'terrified'

 | 11/19/2014

FearA fund manager argues that central banks still do not have the answers, but they are pouring capital into the markets in an attempt to kick start anaemic economies

The US bull market may have a way to go

 | 11/17/2014

Bull MarketThe bull run in the equities market in the US should, if history is a guide, have a way to run. It may still be a buying opportunity for DIY super investors.

Dividends down, but still high

 | 11/17/2014

UpThe Australian stock market has not gone anywhere in terms of share prices, but dividends remain high. It is an income, not a capital gains play.



Subscribe to the Personal Super Investor weekly email to keep abreast of developments in SMSF law and investment markets. SMSF investors looking to improve investment returns from shares, property, cash or other specialised investments, will find the PSI weekly newsletter an invaluable resource.

Subscribe now »


The contents of this website are of a general nature only and have not been prepared to take into account any particular investor's objectives, financial situation or particular needs. Our content is not intended to be advice and must not be relied upon as such. You should seek independent advice tailored to your specific circumstances prior to making any decisions. Personal Super Investor does not provide financial product advice or recommend any financial products: Where this website or it derived newsletter/electronic publication refers to a particular financial product, whether it be within our editorial or a 3rd party advertising, advertising promotion or advertorial, then you should obtain a Product Disclosure Statement (PDS) relating to that product and consider the PDS before making any decision about whether to acquire the product. We also recommend that you should seek professional advice from a financial adviser before making any decision to purchase any financial product referred to on this website. We do not make any representation or warranty that any material on the Personal Super Investor website will be reliable, accurate or complete, nor do we accept any responsibility arising in any way from errors or omissions of our content or any content provided by any advertiser appearing the Personal Super Investor website. We will not be liable for loss resulting from any action or decision by you in reliance on the Material (whether editorial or advertising) on the Personal Super Investor website, nor any interruption, delay in operation or transmission, virus, communications failure, Internet access difficulties, or malfunction in your equipment or software. By using the site you acknowledge that we are not responsible for, and accept no liability in relation to any content contained on the site that you may use, including any other users’ use of the Personal Super Investor website in any circumstance. You use the Personal Super Investor website at your sole risk.