Among the prime reasons for the popularity of exchange traded funds (ETFs) is that the products pass a series of ease-of-investing tests. This is in addition to their typically low costs.
ASX research shows that the market capitalisation of Australian-listed exchange traded products, most being index ETFs, reached $36.27 billion by the end of January – up from less than a billion dollars a decade ago.
And London-based ETF researcher ETFGI reports that assets invested globally in ETFs exceeded a record $US5 trillion by the end of January. This is up from $US728 billion about 12 years ago. (Differences exist between the style of some ETFs listed in Australia and overseas.)
Ways that ETFs pass ease-of-investing tests include:
Ease of trading: Investors buy and sell ETFs by trading on the stock market just like an ordinary share. In a single trade, an investor can gain exposure, for example, to every share on the S&P/ASX 300 or the MSCI World Index (ex Australia).
Ease of portfolio construction: Investors can immediately create widely-diversified portfolios in accordance with their chosen asset allocation by investing in a series of ETFs, each covering a different asset class. Alternatively, Australian investors can now invest in a diversified index ETF, covering major asset classes, again with a single trade.
Ease of checking portfolio drifts: Investors who hold a series of ETFs covering different asset classes – perhaps making up at least the core of their portfolios – can readily check their prevailing asset allocation online. In this way, they can immediately learn how much their ETF portfolio has drifted from their desired long-term strategic or target asset allocation.
Ease of rebalancing: Given the characteristic ease that ETFs are traded, investors can readily rebalance their portfolios back to their strategic asset allocations. (Among the key attributes of a diversified index ETF is that its portfolio is automatically rebalanced between asset classes to remain within an investor’s chosen asset allocation.)
Ease of understanding: Among the main reasons for the popularity of ETFs is that investors can easily understand their attributes and how they work. In short, an index ETF is simply designed to track a specific market and produce similar returns (after their typically low management fees).
While the vast majority of investments in Australian-listed ETFs track broad market indices, more Australians are investing in an expanding range of factor-based ETFs which adopt a systemic, rules-based approach designed to capture a specific investment factor, such as more quality, value or lower volatility.