Yesterday we had our monthly editorial meeting at the Old Hat Factory. Former DR hand Kris Sayce brought up the fact that ETFs are now available in Australia. “Maybe that is something investors who are not doing so hot in Super should check out.”
We agree. ETFs cop it from critics for being too simplistic. We’ve heard more than one stock picker say that ETFs are lazy and that you can always do better picking a good stock than passively tracking an index. But why can’t you do both?
The great thing about ETFs—in our opinion—is that they give investors the chance to own asset classes that were previously only available to high net worth or institutional investors. Commodity ETFs make it possible to profit from moves in commodities without having to trade in the futures market. There are a lot of fixed income ETFs as well, making it easier to profit from moved in interest rates. And of course there is a whole world of ETFs that slice the market into different sectors and groups, allowing you to own the sectors you like the most, rather than the broad market.
When they work well, ETFs (which trade just like shares) correlate to the performance of an index. Because they are passively managed, you won’t pay a large management fee (typically less than 2%). And in general, they give you the chance to get some geographic diversity in your investments.
Most investors have a home bias, which means most the shares they own are in their own market. That’s not a bad thing, say, when you’re in the middle of the greatest resource bull market in history. But Australia’s stock market is a two-trick pony, led by financials and resources. If you don’t’ want to have all your eggs in one basket, ETFs give you the chance to pick some different baskets.
They are certainly no panacea, though. A paper claim is just a paper claim. A gold ETF is not gold. And in a global bear market, getting currency or geographic diversity isn’t going to keep stocks from going down. Asset allocation and diversification are endangered species.
But this is one of those rare occasions where a new product offering from Wall Street is actually aligned with your interests. Sure, ETFs are another way for brokerages to make money. But they do give you more tools to easily trade and own different currencies, markets, and asset classes. That’s why they’re worth a look. The product offerings in Australia are still fairly limited. We’ll take a closer look in the future.
By the way, Barclay’s didn’t pay us a cent to write that. We recommended ETFs in our 2004 book The Bull Hunter for all the same reasons listed above. Since then, they’ve become an enormously popular way to trade and invest.
There was a boatload of e-mail yesterday about the date of parity between the Aussie and U.S. dollars. “P-Day” we’re going to call it. We’re going to pour all the predictions into a spreadsheet so we have a record of who predicted what. And yes, we’ll honour the promise we made that if you guess the date correctly, we’ll give you a free subscription to our newsletters. One prediction per family though.
for The Daily Reckoning Australia