What are ETFs?
ETFs are a type of managed investment fund that are traded on a stock exchange. This means they are bought and sold in exactly the same way as shares, allowing investors to enter or exit a position any time the market is open.
ETFs often track major local and overseas indices such as the ASX200 or S&P500, or sub-sectors such as listed property or smaller companies. Some track more specific indices, for example the MSCI Australia ex-Tobacco ex-Controversial Weapons Index. There are also ETFs that track bond (fixed interest) indices, currencies, and commodities such as oil and gold.
Most ETFs are ‘index funds’, which simply means that they seek to match the performance of a particular index. They usually do this by investing in the same shares in the same proportions that make up the specified index. ETFs can also be based on a custom-designed index, known as smart beta ETF. These indices consist of stocks that have been selected for their potential to out-perform a specific market rather than to simply replicate a market like a traditional ETF. As with other managed funds, the dividends earned and franking credits received are passed through to investors in the form of distributions.