Exchange-traded funds can provide exposure to a broad range of assets that retail investors would otherwise have a hard time accessing – from gold to currency, energy and other specific industry sectors, according to Vinne Wadhera, BetaShares Director of Institutional Business and National Accounts in Netwealth's September portfolio construction series webinar .
Wadhera explained the ETF industry has exploded in Australia over the past five years, with well over 175 products available to investors representing roughly $24 billion in aggregate assets under management. At the outset, many were mostly targeted at various sections of the S&P/ASX 500 index – large, small and medium caps, specific industry sectors and so on – delivering access to Australian equities in a highly liquid, inexpensive and transparent investment vehicle. He suggested that this has been a starting point for many new ETF investors, because “they are seeking a pickup in their cash rate, rather than looking to invest in ETFs in general. That ETF just happened to be the investment fund that offered that pickup.”
There are now far more EFT options available with the advancement in EFT technology, and an increase in the number of individual investors.
Through ETFs, investors can also get exposure to commodities, whether individually – gold bullion, crude oil, agriculture – or a broad basket. Wadhera highlighted the BetaShares Gold Bullion ETF (ASX code: QAU), which tracks the performance of the global price of gold bullion. It hedges the US dollar exposure back to the Australian dollar, which he said was important because “otherwise what you are doing is embedding a currency bet in your strategic gold position,” which can sometimes mean that the gold price return is “eroded by the movement in the Aussie dollar.”
If investors are looking for specific currency exposures, ETFs can also provide access with what Wadhera described as an “institutional level of spread.” If an investor was to directly go and buy US dollars from a bank, the spread can often be quite wide – from 2 to 4%. With a currency ETF, the spread is much narrower – between 10 and 15 basis points. Another benefit is that an ETF avoids many complications associated with foreign exchange trading platforms, contracts-for-difference and foreign bank accounts.
Wadhera also noted that the accessible and affordable nature of an ETF also allows investors to capitalise on opportunities in specific industry sectors – healthcare, for example. Because of a rapidly ageing global population, improvements in medical technology and rising living standards in emerging markets, levels of healthcare spending have increased dramatically.
Wadhera suggested that there are very few ways to access these different exposures as quickly and efficiently as through an ETF, which is one of the main reasons why the sector has grown so rapidly. However easy asset class exposure isn’t the only reason to integrate ETFs into portfolios – a new type of strategy or outcome-based ETF product shows how they can be used as a broader part of portfolio management.