Tim Murphy, director of manager research at research house Morningstar, explains: The advantage of the ETMF format is they're bought and sold like a share, he adds. See other exchange traded products for more information.
What is an Exchange Traded Managed Fund (ETMF)?
This has become a significant issue for the investments industry, given the wave of Baby Boomer investors who have entered or are close to entering retirement. As a result, he says, there is much more focus on "end-client outcomes" rather than relative returns.
Real return funds are also known as "objectives-based" or "multi asset" funds. The Schroders and AMP Capital offerings are the only two where the target is a certain point above inflation. Shorte says their ETMFs will be attractive to investors including self-managed superannuation funds who don't want to use platforms to access the investments. But investors have to choose a fund manager with a good track record.
They do give very good updates and keep investors informed. But because they're looking for a targeted return, they will not be chasing whichever sector is doing really well but those with the most potential.
As Shorte points out, the funds' benchmark above inflation is the "target" and not a guarantee. The three- and five-year rolling returns mean the funds will go through volatile cycles and should be part of your long-term portfolio, rather than for providing income. Shorte advocates investing about 20 per cent of a portfolio in this way, with the rest in more traditional asset allocation to avoid being over-exposed to particular sectors.
The annual management fee for the Schroders fund is 0. The advantage of the ETMF format is they're bought and sold like a share, he adds. Digging down into whether the funds have met their inflation-plus targets, Morningstar's Murphy says over the last three years to end-July AMP's total return is 5.
Based on Morningstar's assessment process, Schroders would be his pick. This market making is funded by cash in the fund. The ETMF bears the risk of its market making activities which will result in either a net benefit or loss on a daily basis.
If the fund fails to have enough cash to close out the net position at the end of each day, says Higgins, it could have to dump assets. This would be further complicated if some assets were illiquid. Here we explain the risks and what you need to know before you invest. An ETF is a type of investment fund that can be bought and sold on a securities exchange market. They generally do not try to outperform the market and will go up or down in value in line with the index they are tracking.
If an investment is called an active ETF then the fund manager is actively trying to outperform the market or index to achieve a different investment objective. See other exchange traded products for information on active ETFs.
ETFs are available for a broad range of assets including Australian shares, international shares, fixed income products, foreign currencies, precious metals and commodities. Standard or 'physical ETFs' buy the underlying investments such as shares and other assets on the reference index that the ETF is seeking to track. Your main investment risk is the performance of the underlying shares or other assets. Other risks are discussed below. Synthetic ETFs have a material exposure to derivatives as well as the underlying assets that the ETF is seeking to track.
Find out more about synthetic ETFs. Products labeled 'exchange traded commodities', 'exchange traded notes', 'exchange traded certificates', and 'exchange traded securities' are not ETFs.
The risks of these products can be different and sometimes much higher than the risks of ETFs. See other exchange traded products for more information. The value of a physical ETF investment can rise and fall daily, usually in line with the index it is tracking. If the offer price you are quoted by a broker is significantly above the NAV, there is a risk you might pay far more for an ETF than it's worth. If the bid price is significantly below NAV, there is a risk you could sell for less than the value of the underlying investments.
This is called a tracking error. This helps create a more liquid ETF market. To receive an ETF price that is closer to the value of the underlying assets, place orders to buy or sell units at least 30 minutes after the share market opens.
This may reduce price discrepancies between the ETF and the price of the shares that it holds. While ETFs may have lower fees compared with other managed investments, management fees can vary and may be higher than the fees of an equivalent unlisted or unquoted index fund. You will also pay brokerage fees when you buy or sell ETF units.
If you want to make a small regular investment in a product that tracks an index, you might be better off using an unlisted managed investment such as an index fund where broker fees won't apply to each contribution, although other fees may apply. The 'buy-sell spread' the difference between the prices that you can buy and sell ETF units at could be considered a cost for you when you buy or sell ETF units, although market makers usually ensure the spread remains relatively small.
If you're selling you can work out the 'buy-sell spread' by subtracting the bid price from the NAV to calculate a 'dollar spread' and then dividing the 'dollar spread' by the 'bid price' to get the 'percentage spread'.
If you're buying you can calculate the 'dollar spread' by subtracting the NAV from the offer price, and then calculate 'percentage spread' by dividing the 'dollar spread' by the offer price. Some ETFs offer exposure to investments such as small companies, emerging markets or commodities that may be harder to sell in certain circumstances, or more complex and volatile than ordinary company shares. This could increase risks for investors. If the ETF tracks overseas assets, changes in the value of the Australian dollar may also affect the value of your investment.
Some funds may be 'currency hedged' to reduce this risk. When you buy units in an ETF located in another country but also traded on an Australian market foreign taxes may apply.