This is the 2nd part of the wider Getting Started with ETFs series. You can jump ahead to other parts below or scroll further to learn more about the types of ETFs out there.
Part 2 - What kind of ETFs are there? (this article)
What kind of ETFs are there?
Now that you’ve done some homework on your investing type, the next step is to choose what ETFs might be suitable for you?
In Australia there are a few key types of ETFs available, Equity, Fixed Income, Commodities, Property, and Cash/Currency. Equity ETFs are split into regions (Australian, Asian, Emerging Markets and Global), other groups have an Australian domestic versus global type split. The ASX and Chi-X split these categories out in their report and we use them in some of our data visualisations.
Figure 1 - Eftracker latest returns for 2021 by ETF Category
Additionally, we've pulled together some of these ETFs into related categories you can use to compare daily prices via Google Finance. Check out the link in the resources section at the end of this article.
Figure 3 - Example from ETFtracker's Google Finance resource page
If you’re a risk averse investor or closer to retirement, fixed income/bond ETFs should be looked at because on the investing risk scale, they hold lower risk assets (corporate and government bonds) but at the same time, have limited upside price potential.
Apart from the ETF categories available, there are passive and active ETFs with the former being more common. Passive means ETFs which track a particular index. Active are ETFs which have more active management behind them. There are pros and cons to both but there is room for both to be in a portfolio given the benefits they provide. Passive is safer as it tracks the indices it follows and whilst active has underperformed, it’s built to not just track an index but also outperform it.
Figure 2 - Investopedia page on Active vs Passive ETFs
Another area to look at is the thematic of the ETFs you are looking to get exposure to. If your answers to last weeks question on what you want exposure too said something like technology or ESG or healthcare then this means you are looking tot be involved in a particular type of ETF. These ETFs which follow a theme are different to broad-based ETFs which usually track a region like Australia (e.g. VAS, IOZ). Whilst they’re categories as well, property and commodity ETFs can also be considered answers to the question of what you want exposure to so these are things to consider.
Deploying a strategy to bring these together is also important and often, a core-satellite strategy is mentioned by advisors. This type of strategy often sees a broad-based regional type ETF or set of ETFs chosen as the core part of the strategy (e.g. IOZ or VAS for Aussie exposure and NDQ or STW for global) and then satellites being in the realm of ETFs you might have particular interest in like a technology play (ROBO or ATEC) and ESG (ETHI or IMPQ) or you want exposure to fixed income ETFs (like XARO or ECAS) and more.
After choosing whatever ETFs fit into your strategy, your risk tolerance, how much time you want to hold the ETFs and other factors will affect how much weighting you put to each. A lower risk approach sees the core as having a higher weighting compared to the satellites and as the risk profile changes so does the weighting between the pair. It’s up to you or your financial adviser to help choose what works best. You can read more on core-satellite strategies below.
Resources
Couple of options to read and learn more for each of the 3 sections on Active vs Passive, Core-Satellite approaches and the different ETF categories out there. Enjoy!
Active vs Passive ETFs
Core-Satellite approach
ETF Categories
Monthly ASX Report: https://www2.asx.com.au/issuers/investment-products/asx-funds-statistics
ETFtracker's Google Finance links: https://www.etftracker.com.au/google-finance (we've made it easier to compare similar ETFs so check out this page)
Figure 3 - Bell Potter ETF Monthly report
Next up its all about What data we look at when analysing ETFs.