Global Diversification through a Handful of Trades
At MK Wealth Solutions, we are avid believers in building long-term, well-diversified equity portfolios based on solid macro-economic principles and valuations.
One of the most cost-effective, efficient and transparent strategies of executing this, is through the use of Exchange Traded Funds (EFTs). The ETF market has boomed recently, going from just 19 listed ETFs with $1.1bn in Funds Under Management (FUM) in 2008, to 134 locally listed funds with more than $21bn in FUM last year.
But what exactly are ETFs?
ETFs are a blend of both traditional managed funds and shares. Unlike funds though, ETFs can be bought and sold on the ASX like shares, which provides liquidity. However, like managed index funds, they contain a diversified portfolio of securities designed to track specific indices. Some indices are narrow, tracking a single market sector with minimal holdings, while others are as broad as the entire market with hundreds of holdings. Dependent on the underlying assets within the ETF, it can also pay a partially franked dividend yield, like a direct share.
Benefits of ETFs:
- ETFs provide instant Diversification: Investors can easily obtain exposure to a specific asset class (such as Fixed Interest), market cap (such as Mid-Caps or Small-Caps), country (such as the UK or Emerging Market) and sector (such as Property or Industrials).
- Liquidity and Flexibility: Like direct shares, ETFs provide investors with the flexibility to trade at any time during market hours. ETFs can be bought or sold like a share, through any broker, investment adviser or online trading platform. As a result, it allows investors to quickly respond to changing market conditions, if needed.
- Cost Efficiency: ETFs are generally lower cost than actively managed funds and even some index funds. Due to lower trading costs, they are also less expensive than purchasing a number of individual stocks (especially on global exchanges). As competition in the ETF market increases, both iShares and SPDR (two of the largest ETF providers) have slashed their management fees as low as 0.15% pa on their flagship Australian Equity ETFs.
- Transparency: Portfolio holdings within the ETFs are disclosed sometimes as often as daily – meaning you know exactly what you’re invested in.
- Tax Efficiency: Due to the diversification offered through ETFs, it generally has a lower portfolio turnover.
As a result, we believe it a prudent approach to develop a long-term investment strategy based on your specific needs and circumstances and economic fundamentals, identify the growth areas in terms of asset classes, regions, and sectors – and utilize ETFs to obtain the required exposure to that asset. It certainly remains a viable investment strategy for us – and one we believe will pay off well into the future.
Maritza Kriel is an Authorised Representative No 454079 of Synchron ABN 33 007 207 650 AFSL 243313. The information provided in this article has been provided as general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your personal financial adviser before you make any decision regarding any products mentioned in this article. Whilst care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither MK Wealth Solutions and Synchron, nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.