Exchange Traded Funds

Investors spend hours of their time deciding which stock to buy. Everybody wants to profit, and stocks giving good returns are the target. As opposed to trading individual stocks, trading ETFs (Exchange Traded Fund) allows you to invest in a wide range of shares and gives you a gestalt picture of the Australian sharemarket. Think of ETFs as trading the market in one trade.

To learn more about your ETF, you can go to the ASX and the ETF issuer website where you will find distribution, market prices (ASX prices are delayed by at least 20 minutes) and company details and announcements.

Net Asset Value

Net asset value (NAV) is the ETF's per-share value. NAV is calculated by dividing the total value of all securities in its portfolio, less any liabilities, by the number of fund shares outstanding. You can find the NAV in the issuer's website and under the Company Announcement section of the ASX website.

It's important to get a good grasp of the sharemarket index before getting into the details of domestic ETFs. Domestic ETFs ride on the back of the sharemarket index. What is a sharemarket index? A sharemarket index is a measure of the performance of a group of stocks as opposed to one stock alone. The S&P/ASX 200 and All Ordinaries indices, for example, are whole market measures while the S&P/ASX 200 Utilities index is a sector measure.

International ETFs, as the name implies, allows the investor exposure to global sharemarkets. There are several reasons why investors buy international ETFs. First, the Australian market represents only a tiny chunk of the entire world's market capitalisation. Investing in international ETFs means exposure to the big kahunas of the overseas market like Berkshire Hathaway and Microsoft.

Investing in international ETFs is also much simpler than investing in individual overseas stocks. You buy these ETFs using foreign currency and you receive distributions also in foreign currency.

A currency exchange traded fund tracks exchange rate movements, as opposed to index movements. It tracks the performance of the Australian dollar against a foreign currency, for example, against the US dollar.

What is an exchange rate? It is the price of one currency in terms of another. The AUD-USD for example. This exchange rate can be expressed in two ways: the equivalent of one US dollar in Australian dollars, and the equivalent of one Australian dollar in US dollars.

Like standard exchange traded funds, the goal of synthetic ETFs is to track and mirror an index or benchmark performance. So what's the difference? While standard ETFs usually invest in all the securities in the index or a sample of the securities, synthetic ETFs enters into a swap agreement with a counterparty in order to match the index performance.

How does Synthetic ETFs Work?

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.