What are Exchange Traded Funds?
Exchange Traded Funds (ETFs) are passively managed index funds that are listed and traded on a securities exchange. The main aim of an ETF is to track the performance of and/or gain a broad exposure to a particular index, sector or a commodity.
The first ETFs were launched in the early 1990s, but were little-known until about 1999 when investors began realising that ETFs were consistently delivering better returns at lower commissions than unit trusts. Since then hundreds of ETFs had been established in securities exchanges around the world.
ETFs can be described as investment products that have evolved past unit trusts in offering improved medium to long-term investment returns with relatively little risk.
Why should Exchange Traded Funds be your first choice?
Until now investors wanting to place low-risk medium to long term investments would place their funds in individual company shares or an Active Managed Unit Trust Fund (unit trust).
There are four compelling reasons why an ETF can be the better investment alternative:
- Low Cost
ETFs are programmed to passively track performance of selected, equity or fixed income indices, commodities, and other assets, while unit trusts are actively managed by fund managers. With fewer salaried persons involved in operating typical ETFs, their running costs are significantly lower and commissions typically less than 1%, whereas unit trusts may charge up to 3% commission.
- Tradability
ETFs offer exposure to broad markets through a single investment transaction and respond to market movements on securities exchanges throughout the trading day.
Unit trusts, on the other hand, require the active attention of fund managers, therefore investors will not know when and at what prices the shares in their unit trust portfolios are being traded.
ETFs are also easily traded, with investors buying and sell ETFs like shares, typically through a stockbroker account. Investors can also invest in ETFs through investment plans with accredited financial services providers (can be referred by Absa Capital).
- Transparency
The holdings of an ETF closely mirror the underlying index it tracks as a benchmark. These components are disclosed every trading day. In contrast, unit trusts disclose their portfolio holdings much less frequently.
- Diversified investment
ETFs give investors a straightforward and inexpensive way to obtain a broad exposure to selected indices, sectors, countries or commodities.