Exchange Traded Funds (ETFs) Comparison

Submitted by Craig Strzelecki on 5 May, 2008 - 19:47

Exchange Traded Funds ETFs
Anyone who is looking for an Exchange Traded Funds or ETFs to invest on would definitely do a comparison of the providers and products first

Anyone who is looking for an Exchange Traded Funds or ETFs to invest on would definitely do a comparison of the providers and products first. This is the most basic technical step any knowledgeable investors would do. However, it can be a little bit difficult and complicated to do this when you are contemplating on trading in American Stock Exchange and in NASDAQ because of the so many choices and options that you would have to choose from. You would have to spend much of your time with the risk that goes with the wrong choice you will make. Why would you trouble yourself with the very complicated international market when you can just focus and narrow down your choices with the Exchange Traded Funds available in Australia? In Australian setting, you are only faced with two providers and six products to choose from and this will definitely not take too much of your time. You save much of your time plus the risk you get is lesser.

I. ETF Tracking

It is a common knowledge that with the traditional Exchange Traded Funds, geographic or sector region and an index is tracked. For example, the performance of the top 200 companies in Australia is tracked by Exchange Traded Funds that tracks the S&P/ASX 200 Index. To make it simpler, the fund and stocks investment depends on the market capitalization of the company. All the gains and losses as well as the dividends and franking credits obtained will be passed on to the investor.

Before buying any ETF, one has to know first everything about it. It is also important to choose an index and sector tracking ETF that you think and firmly believe will show a great performance over the next few years. You might as well choose one that will create balance in your overall portfolio.

The niche in the ETF trading is that it is better to purchase an ETF that is able to track a larger market. This is for the purpose of creating a stronger foundation for the portfolio of the client’s share. This can be compared to creating a greater portion in the portfolio before the real activity proceeds. After doing this, bank or additional resources may be added. However, the Exchange Traded Funds work mainly as the diversifier. This is a strategy known as the core-satellite approach.

II. Exchange Traded Funds: Active or passive

There are two kinds of Exchange Traded Funds; active or passive. Understanding the difference between these two is important before one decides to invest in ETF.

An ETF that can track and monitor the S&P/ASX 200 Index performance is one example of a passive ETF. It is as simple as mimicking the index performance.

An active ETF on the other hand is the one that tries to improve the performance of the index through fund management. Normally, a buying and selling shares approach is done to hit the returns of the funds. It also works in preventing the possibility of the funds’ returns to go down during the stage of market correction. This may sound very interesting and appealing to those who are planning to invest in ETF. However, it is still important to remember that the success of an ETF still depends mainly on how the manager of that fund manages it.

III. ETF Performance

While a past performance is often used to forecast a future performance of an ETF, it is still important to remember that the past performance of an ETF will not guarantee an accurate forecast of the ETF’s performance in the future.

Also, keep in mind that an index or sector tracking ETF does not really try to give a maximum return rather; it tries to maintain and keep the returns of the represented sector or index stable. To say it simpler, if the returns of an S&P/ASX 200 index fall on 10% for that year, the ETF for this also tries to maintain that 10% returns for that year. Nothing higher than that and an ETF failure can be determined through a poor return which is lower than the index return.

However, if the market had a poor return such as 3% and the ETF had the same result, there’s no reason for you to blame the ETF because generally, the ETF had done its job.

Exchange Traded Funds that were managed actively have a completely different thing on mind. It strives to give you a return higher than the market return in order to please you so as you can monitor them more toughly when the returns do not turn out the way you expected it to be.

Moreover, most ETF that were actively managed usually invest according to the style of investment done. An example for this is the value or growth and most of the time, the quality of performance made according to the style of investment is either favourable or unfavourable with the market.

Download our FREE App


Signup for Free
Don't miss out on your free share trading articles.


Free Risk Money Management Calculator for those who sign up!