Episode 70 - FS360 Podcast - Exchange Traded Funds (ETFs)

Investsense’s Jonathan Tolub says Exchange Trader Funds (ETFs) have “exploded in popularity” as a way for investors to access the market.

Speaking on the FS360 Podcast with Mulcahy & Co Financial Planning Director Thayne Turley, Tolub discussed the role that ETFs could play in client’s portfolios moving forward.

“It’s a tool, it’s a way in which to access the market. You can access the market via buying the right share, you can access it by buying an ETF or you can access the market by buying a fund,” he said.

“I think primarily we want to look at it as one potential tool that we want to use and we make use of all three of these tools … depending on the underlying exposure and what we actually want to invest in.

“ETFs have exploded in popularity, (one reason is) the cost aspect, which I think is a very big one. The second aspect is just ease of access.

“Let’s say you don’t want to pick your own stocks, you don’t want to decide between BHP and CBA … you just want to buy the whole market. An ETF allows you to buy an ASX 200 in one share, so you buy the whole market in one share.

“If you started off with world equities, then you have US, Europe, Asia, Japan, the UK etc.That’s really been a boom for us because it’s actually allowed us to be much more tactical about our exposure.

“Our process helps us identify where in the world we think there are attractive risk-reward relationships (4:10), where we think some equity marks have been beaten down and from a fundamental perspective are attractive and attractive to own on a long-term basis. An ETF is something that allows us to implement that in a very efficient way.”

The growth of Japan’s market across the past 10 years has provided an example of where ETFs could fit in an investor’s portfolio.

Japan’s market and real estate crashed in the late 1980s and early 90s. It took 20 years to overcome that, before 10 years ago they started implementing market reforms to make their economy more efficient and to make market and equity investing more efficient andprofitable.

“We can buy direct shares, we can go to the Japanese exchange and buy shares of Toyota, Mitsubishi etc, but that’s very clunky because we’re based in Australia, there’s exchange risk. Even if we get to that point, we can maybe buy two, three shares, but we’re not going to get the broad exposure that we desire,” Tolub said.

“We need something that’s well diversified, we don’t want to bet on Toyota, we want to bet on the Japanese equity market, a broad exposure is more profitable, so therefor you’re left with two choices which is a fund or an ETF.

“There’s not a lot of funds in Australia that specialise in Japanese investing and actually tothe best of my knowledge there’s only one. We looked at it, it’s not uninteresting, but also quite expensive.

“Then we looked at the ETF, it was a lot cheaper and provided us with the exposure that we wanted and we ended up going that way.”