A new type of investment strategy best described as a cross between mutual funds and a listed share that is now becoming increasingly popular is the exchange traded fund. Buying a unit of an exchange traded fund on the Australian Securities Exchange (ASX) means buying a whole diversified portfolio of domestic or international companies; however, it is done through one security. Due to this, one can buy on a margin or sell short. In other words, everything that one can do with a listed share can be done here.
Since ETFs have index funds as their foundation, it is necessary to buy them first. The sole function of a mutual fund is to get returns for investors, and to accomplish this, fund managers are on the lookout to beat the return of a benchmark index like the S&P 500. As it turns out, most managers failed at this, in spite of having high-powered, very expensive analysts at their disposal. So the idea developed to eliminate the expensive analysts and just have a fund manager invest in the constituent stocks of a benchmark similar to the S&P 500. This would provide the investors with the added benefit of lower costs, in terms of fees. This is how exchange trade funds came into being. Essentially, they are index funds remodeled so they can be traded like shares. Large associations create ETFs in the primary market, and then break them up into shares which in turn are traded on an exchange.
Since listed shares undergo vagaries of supply and demand, arbitrage is employed; this helps to precisely keep track of an index. The associations can switch between the primary and secondary markets when discrepancies which can be exploitable arise in pricing. This keeps prices in check.
The main benefit associated with ETFs is their flexibility. They can be bought or sold anytime at whatever the going rate they happen be trading at during that day, just as with stocks. This is unlike mutual funds, which are only priced one time, at the end of the trading each day. Since ETFs can be traded like stocks, they can be bought on a margin. This means that they can be bought with borrowed money with the hope to make gains.
Different techniques can be used to profit from them, like downturns in the market and short selling. ETFs have very low operating costs. Their operating costs are significantly lower than traditional mutual funds. They also have built-in tax efficiency. In the case of mutual funds, if the manager sells stock for gain, the shareholders are subject to taxes even if they havent sold their fund shares. In the case of ETFs, the buying and selling takes place between ETF investors most of the time and there are no taxable gains that are passed on, since the ETF itself does not do the buying or selling.
Here are three of the currently best performing ETFs. The first one is the Russel High dividend Australian Shares ETF. This provides a portfolio of fifty blue chip Australian companies with focus on dividends. The next one is the SPDR S&P/ASX50 Fund, which duplicates the performance of the top 50 Australian Shares and finally, the SPDR MSCI Australia Select High Dividend Yield Fund. This fund replicates the top 200 Australian shares.
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