Exchange traded products (ETPs) are traded on the stock exchange just like shares, which provide investors with benefits including ease of buying and selling, competitive cost, and diversification.
Investors now have access to a greater diversity of ETPs, with four major types of ETP structures now trading on the ASX.
Listed Investment Companies (LICs)
LICs have been trading on the ASX for almost 100 years, making them the oldest ETP category. Like other ETPs are traded on market on the stock exchange. They are similar to Active ETFs because they are actively managed: an internal or external investment manager is making buy and sell decisions.
But there are a number of elements that make them different. They are incorporated as companies (other ETPs have a regulated unit trust structure). They are only required to disclose net asset value (NAV) each month.
And they are closed-ended: they have a fixed number of shares and thus all trades on market are between buyers and existing shareholders (sellers). This closed-ended structure means LICs can trade at either a discount or premium to NAV because a new supply of shares can’t be created to meet demand. Like any company listed on the market, therefore, the price will oscillate based purely on demand.
Exchange traded funds (ETFs) are similar to traditional managed funds but are traded on the stock exchange. ETFs are passively managed – they track an index or asset class to replicate its performance.
Investors gain a number of benefits from ETFs. Like shares, they are easy to buy and sell and can be traded and held in a brokerage account. Because of their passive/rules-based strategies, ETFs are generally low cost.
And importantly, through just one trade, ETFs allow investors to access a broad range of a securities that help diversify their portfolio. Their ease of use, low cost and liquidity has made them one of the fastest growing financial instruments in the world in recent times.
Active ETFs are like traditional ETFs in that they are similar to a traditional managed fund but traded on a stock exchange. Unlike ETFs, however, Active ETFs use an active investment strategy: the investment manager is proactively making buy and sell decisions to try and outperform an index or specific asset class.
Active ETFs provide the benefits of ETFs, including liquidity and ease of use, but with the potential for outperformance.
Active ETFs differ from traditional ETFs in some other ways. The managers of Active ETFs are only required to disclose their portfolio holdings quarterly, so they don’t lose a competitive advantage. Unlike ETFs which have regular ongoing disclosure, there is not enough information for market makers – third parties that help ensure a liquid market – to create a market for Active ETFs. Therefore, managers of active ETFs act as market makers themselves.
mFunds offer a way to buy and sell unlisted managed funds and access a broad range of diversified strategies and instruments. Like traditional managed funds, mFunds are not traded on exchange via a live intraday price. Instead, they are bought and sold directly from issuers.
The trading is executed using the ASX’s electronic systems (the mFund Settlement Service), which streamlines the process and makes trading and record keeping easy. Investors can use brokers and advisers for mFund, and unlike traditional managed funds, they don’t have to fill in application forms.
mFunds are held electronically using the same Holder Identity Number (HIN) investors utilise for other ASX traded securities, which means they are consolidated in the same place as shares making portfolio management easy.
mFunds are bought and sold on an end of day basis. The price at which an investor buys and sells is therefore the same as the true value (the net asset value, NAV) of the underlying assets of the fund.
Source: AMP Capital 9 May 2018
Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs.Before making any investment decisions you should consider the appropriateness of the information, and seek professional advice having regard to your own circumstances.