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Exchange traded funds (ETFs)

Buying a basket of shares or assets

Page reading time: 5 minutes

Exchange traded funds (ETFs) are a low-cost way to earn a return similar to an index or a commodity. They can also help to diversify your investments. You can buy and sell units in ETFs through a stockbroker, the same way you buy and sell shares.

How ETFs work

An ETF is a managed fund that you can buy or sell on an exchange, like the Australian Securities Exchange (ASX).

In Australia, most ETFs are passive investments that don't try to outperform the market. The role of the fund manager is to track the value of:

The value of the ETF goes go up or down with the index or asset they're tracking.

The ASX ETF investor course can help you learn more about how ETFs work.

Types of ETFs

Physically-backed and synthetic ETFs

ETFs can be either physically-backed or synthetic.

When you invest in an ETF, you don't own the underlying investments. You own units in the ETF and ETF provider owns the shares or assets.

What you can invest in through an ETF

ETFs are available for a range of asset classes and individual assets.

These include:

Visit the ASX website for a list of ETFs you can invest in.

What's not an ETF

Some products track an index or asset and 'look' like an ETF. But they're not ETFs and can be higher risk. These products include:

There are also exchange traded managed funds and exchange traded hedge funds. With these, the investment manager tries to outperform an index and may use high risk trading strategies.

Pros and cons of investing in ETFs

Before you invest in an ETF weigh up the pros and cons.

Pros

Cons

How to buy and sell units in ETFs

You can buy and sell units in an ETF through a stockbroker. It's the same as buying and selling shares.

Settlement of trades takes place two business days after you buy or sell the ETF. You have to pay brokerage fees when you buy or sell an ETF.

Compare the price and NAV

You can check if an ETF is fairly priced by comparing it's price on the ASX with the NAV. The NAV is calculated by taking the assets of the fund subtracting the liabilities and dividing this by the number of units in the fund.

ETF providers give updates of the NAV:

The price you can buy and sell an ETF at should be close to the NAV per unit. But at times the price may move away from the NAV.

Most ETFs also provide an real-time NAV updates. These are called indicative or intraday NAV (iNAV). You can use an iNAV as a reference point during the day to understanding if an ETF you're buying or selling is at or close to the NAV per unit. You can see the latest iNAV from your broker by adding 'Y' before the ETF ticker. For example 'YABC' or the ETF ticker 'ABC'.

When to buy and sell ETF units

To get an ETF price that trades closer to the NAV, place your trades at least 30 minutes after the market opens.

It's also better to buy or sell ETFs when the market for the underlying asset is open. For example, if you're an ETF that tracks Asian shares, place your orders when the Asian sharemarket is open.

Check the product disclosure statement before you invest

A product disclosure statement (PDS) contains a lot of information you'll need to know about an ETF. It includes information on:

If you have questions about an ETF you can contact the fund manager or get financial advice. You can also check recent market announcements for new information on an ETF.