Exchange Traded Funds
ETF’s are a type of security that tracks a particular index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same way a regular stock can. Exchange traded fund are open ended meaning that you buy and sell the ETF from the fund provider.
How do ETF’s work
When you purchase shares in an ETF, you are effectively purchasing and getting exposure to a range of shares included in that fund, instead of one share. ETF’s are a really simple way to provide diversification without the need to purchase multiple stocks and pay brokerage on each purchase. ETF’s often follow a market weighting and re weight each quarter to ensure
If you wanted exposure to the ASX200 for instance you could buy each 200 companies individually and pay brokerage fees on each trade or your could buy and ETF that tracks the same index and only pay brokerage once. This one purchase gives you instant diversification and exposure to Australia’s top 200 companies
ETF’s vs LICs
Exchange Traded Funds (ETFs) and Listed Investment companies (LICs) are often thought of in the same light when it comes to passive investing. While and ETF is a select basket of stocks or index, an LIC contains actively managed investments where a fund manager individually selects a portfolio of investments (such as equities or fixed income) that you can buy and sell on a stock exchange.
The big difference between the 2 types of assets is the structure. An ETF is whats known as open-ended, meaning that the ETF provider produces more shares as demand increases, whereas a LIC is closed-ended, which means that a set number of shares are issued. This can mean the share price in a LIC can move significantly from its net asset value (NAV). The fixed amount of capital within a LIC can be a good thing if you have lots of buyers driving the price above its NAV, however, the opposite is far more common. After a LIC lists on the stock market, the majority end up trading at a discount to their NAV. An ETF is much more likely to closely track its NAV.