With the Exchange Traded Fund market now bigger than ever, ASX investors have access to a broader range of exposures than they ever have before.

It used to be that if you wanted an exposure to US listed shares, you had to have a US stock broker. If you wanted to trade US treasuries, you needed a US fixed income broker and likely a significant number of dollars. However, the massive explosion of exchange traded funds (ETFs) has meant that regular Australian investors can now gain these exposures (amongst many others) through ASX listed products.

Exchange traded funds (ETFs) are basically investment funds that are listed on a stock exchange. They usually have a strict mandate to hold the assets of or track the performance of an underlying index or asset.

The most popular ETFs are essentially index funds, tracking the performance of an underlying index, most commonly a stock market index. Three of the top five most popular ETFs track the performance of the US S&P 500 stock market index, but there are plenty of funds tracking many of the world’s financial indexes and markets.

Warren Buffett has specifically recommended such funds to maximise retirement savings; “Consistently buy an S&P 500 low-cost index fund,” He has previously stated, adding “The trick is not to pick the right company,” “The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently.”

This can be advantageous because it can allow you to mirror the performance of the S&P500 whilst only buying one listed product, as opposed to buying 500 US listed stocks; avoiding significant brokerage, fees and other complications from owning such a large number of stocks.

Using an individual ETF can allow you to diversify across multiple assets in a market or index. However, used in combination – a portfolio of ETFs can allow you to construct exposures that are diversified across asset classes, geographical regions, currencies, and other distinguishing characteristics – the kind of portfolio that once upon a time only a very rich person could construct.

Constructing a portfolio like this can reduce the volatility of your returns, and you can gain a broader exposure to domestic and international markets at a much lower investment cost than these exposures would have once cost.

The ETF market is growing considerably around the world – with many advisors and planners now considering them for their clients; so when next considering what stocks to add to a passive portfolio, consider instead adding an exchange traded fund.

If you would like to discuss using ETFs in your portfolio, or even constructing a portfolio of ETFs, you can call Sam Green on 03 8080 5795.