When Exchange Traded Funds (ETF’s) first started being marketed a number of years ago I was initially apprehensive about investing in them, as one of the main investing rules I live by is to only invest in something I understand. But after reading a number of articles a few years ago and doing some independent research, I was comfortable to start investing in ETF’s and now have a portfolio of ETF’s that gives me exposure to the performance of the Australian and International share markets, the bond market, and selected commodities.
So what are ETFs and why are they a good option for Australian Expats?
What are ETFs?
An exchange traded fund (ETF) is essentially an index fund that can be bought and sold on the sharemarket like any other share. In my article, The Truth About Managed Funds and Index Funds, I discussed why you should consider investing in index funds over actively managed funds. In summary, index funds provide you with a diversified investment that historically have on average outperformed managed funds managed by professional fund managers.
What are the Advantages of ETF’s?
One of the main reasons I like ETF’s so much is that they have all the advantages of shares (such as being able to trade easily on the sharemarket), along with the benefits of index funds (such as the diversification and low costs). And because they can be traded on the sharemarket it is much easier for Australian Expats to invest in ETF’s than it is to invest in unlisted managed or retail index funds. As an Australian Expat, if you want to invest in an index or managed fund with an Australian fund manager, it can be quite difficult to open a new account. However, it is possible for Australian Expats to open a share trading account in Australia if they do not already have one.
In summary, the key benefits of investing in an ETF include :
- Low Cost – the management fees of ETF’s are significantly lower than investing in an actively managed fund and usually lower than investing in a unlisted retail index fund (which are not traded on the stock exchange)
- Diversification – index funds invest in all or a representative sample of the shares that make up the benchmark index, providing a highly diversified investment.
- Tax Efficiency – the low turnover and buy and hold nature of index funds minimises capital gains tax payments whilst holding the ETF (relative to an actively managed fund)
- Liquidity – ETF’s are readily traded on the stock market
- Outperformance – index funds historically have on average better returns than professionally managed active funds
How Do I Invest in an ETF?
To invest in an ETF you need to have a share trading account. If you do not already have an account, it is possible to open a share trading account with an online broker (such as E-Trade or Commonwealth Securities) while overseas. The exact requirements for opening an account will depend on whether you have an existing relationship with the company and where in the world you are living.
You then need to determine which ETF you want to invest in (see below), and you can purchase units in the ETF using the associated stock code just like you would buying shares in any other company on the stock market.
What different ETF’s are there?
In Australia, there are a number of different ETF fund managers – some of the biggest in Australia include Vanguard, Betashares, and ishares. You can obtain more information on the different ETF’s each company offers at their respective websites. What you will notice is that there is a large number of choices. ETF’s can be grouped into a number of categories as shown in the table below.
|Category||Aim of ETF|
|• Australian Shares – Broad Market||• Tracks the broad Australian share market|
|• Australian Shares – Sector||• Tracks a sector within the Australian share market (eg. resources)|
|• Australian Shares – Strategies||• Only invests in certain Australian shares that meet a specified criteria (eg. high yield)|
|• International Shares – Broad Market||• Tracks the broad international share markets|
|• International Shares – Sector||• Only invests in certain International shares that meet a specified critera (eg. healthcare)|
|• Fixed Income and Cash||• Tracks the performance of bonds and cash investments|
|• Currency||• Tracks the performance of the selected currency|
|• Commodity||• Tracks the performance of the selected commodity|
If you are just starting out on your sharemarket investing you could consider a broad Australian share or a broad international share ETF. Two options from Vanguard, for example, are the Vanguard Australian Shares Index (stock code VAS) or the Vanguard MSCI Index International Shares (stock code VGS). Management costs for these funds are no more than 0.20%pa.
Disclaimer : The information contained on this website is intended only as general commentary and does not purport to be comprehensive. No warranty is provided as to the accuracy. It should not be regarded as tax, financial, or legal advice. Remember, the value of an investment can go down as well as up, and you should seek professional advice that considers your personal situation and country of residence before taking action.
Are you confused about the tax implications of your overseas assignment? Download my Special Report – Tax Implications For Australians Working Abroad