If you wanted to get a share portfolio on the go, how much do you think you might need to invest? A few grand…maybe a bit more.
Unless you had a decent chunk to start off with, chances are you’re going to spend a lot on brokerage and end up with a pretty small holding in just a handful of shares. Even if you had $20,000 to invest, how far do you think it might go?
If you divided it equally among 10 companies, for example, and you followed the typical advice out there, you’d end up owning some bank stocks, a telco, maybe some ‘blue chip’ industrials, and one of the large supermarket chains.
But with just $2,000 to spend on each company, what would you be able to buy? Well…it would get you exactly 27 Commonwealth Bank [ASX:CBA] shares, around 380-odd Telstra [ASX:TLS] shares and just 50 shares in Wesfarmers [ASX:WES], owners of Coles. Probably not something to write home about.
Now these aren’t recommendations, but they are pretty typical of companies owned by a lot of private investors.
Using an online broker, you’re likely to pay around $20 a trade, so that’s another $200 gone just in setting your portfolio up. And every time you want to exit or adjust each holding, that’s another $20. Add it up over a year and you’ll be surprised how much these costs eat into your portfolio’s return.
One product that can be a great alternative to all this hassle is an exchange traded fund (ETF). Or to use the more up-to-date broader description, an exchange traded product (ETP). An ETP is a managed fund that trades on a stock exchange, making it more accessible for investors to buy and sell.
There’s a reason the ETP market is booming
ETPs aren’t new; they’ve been around for over 10 years in Australia. But they’re currently enjoying a massive boom as ever more products come on to the market to meet demand. Right now, there are in excess of 130 ETPs on the ASX to choose from.
ETPs have attracted a massive amount of investors’ funds worldwide. Something like US$2–3 trillion worth of assets are invested across thousands of funds around the globe. These products are not a passing fad.
There are a multitude of reasons for ETPs popularity. First, you don’t need a whole lot of money to get started. You can invest just a $1,000 or less.
And that leads to perhaps their biggest advantage. Just one ETP can give you exposure to all of the stocks in the ASX200, or ASX 50, for example. Or a myriad of other asset classes. So rather than buying 27 CBA shares, you could instead own $2,000 worth of 200 shares, through just the one holding. And importantly, just the one lot of brokerage.
And if you don’t have the time or inclination to set up an offshore broking account, ETPs allow you to invest in a range of offshore markets through just one holding listed on the ASX.
So, if you want to invest in the S&P 500 stocks in the US, there are ETPs that cover that. Also emerging markets, Europe and Asia. And if you want to buy gold or oil, for example, but don’t know which stock to buy, many ETPs that specialise in commodities.
If you’re interested in investing offshore, but are worried about foreign exchange risk, then there are a range of ETPs that are currency hedged as well.
Active or passive fund?
Splitting ETPs further, there are both ‘active’ and ‘passive’ funds. A passive fund simply replicates the structure of an underlying index. So, if you bought an ETP on the ASX 200, the fund would match the weightings and constituents of that index as closely as possible.
Another good thing about passive funds is that their fees are typically much cheaper than an actively managed fund, or a more traditional managed fund that you might invest in through a financial planner.
For example, a Vanguard ETF, the Australian Shares Index Fund [ASX:VAS] — a fund that replicates the ASX300 — has AU$1.3 billion in funds under management, and charges a management fee of just 0.15% per annum. Compare that to a traditional managed fund or an active manager and you’ll see the type of bargain this offers.
Where the ETP market is really growing, though, is in actively managed funds. As the name implies, the fund employs a manager to implement a set trading strategy, with the aim of generating above market returns.
There are funds that specialise in ‘dividend stripping’ for income focused investors. And for growth, there are biotech and technology ETPs. And with the growing realisation that they’ll need to invest offshore, investors are seeking funds that actively stock pick international equities.
However, for employing the services of an active manger, expect to pay a higher fee. While a passive ETF might charge around 0.3% or less, an active one might charge 1.00–1.50%, so factor this into your costs.
With the boon in the ETP industry, it’s not surprising that a range of new players are trying to get in on the act. Especially when there is so little growth in other areas of the market. But that’s not a bad thing.
For an investor, it means a bigger range of products available. And even better, more competition when it comes to fees. While costs always seem to go up in everything else, ETPs fees are coming down.
ETPs can be a great way to get invested in the market, without the hassle of buying a swag of individual shares. And if you’re new to the market, they can take away one of the hardest parts of investing — choosing which shares to buy.
Even if you just have a couple of thousand dollars to invest, you’ll soon have access to a range of investments, both locally and abroad. And the best thing…if you want to change your fund, no need to book an appointment with your financial planner — it’s just a click or two of the keyboard away.
I’ve recommended several ETPs to subscribers of Total Income. The particular focus of these products is in generating a regular income stream. You can find out more here.