X-Plained: How to Research ETFs
How do you find the right ETF for the job? With well over 300 ETFs available on the Australian market, it can be difficult to decide which ones could fit into a portfolio. Learning how to identify ETFs, understand what they invest in, and which documents you need to check is the key to researching which ETFs will be suitable to help achieve your investment goals. In this X-Plained, the Global X US 100 ETF (N100) is used as an example throughout to explain what information you need to know.
- Understanding key information about an ETF
- What exposure an ETF can help you gain
- Which documents should you review before making an investment decision
Understanding key information about an ETF
Starting simple, the fund name and ticker code help you to identify an ETF. The fund name is the full name of the ETF, it indicates what the fund invests in. For example, the Global X US 100 ETF (ASX: N100) invests in the top 100 US-listed companies on the Nasdaq exchange. Tickers are unique codes used to identify ETFs on a stock exchange.
The management fee (also called the management expense ratio or MER) is the annual cost charged by an ETF provider to manage the fund. For example, N100 has a management fee of 0.24% per annum. If you invested $1000 into the ETF, you would pay $2.40 in fees per annum. The ETF provider essentially packages up all the costs associated with the fund, such as international taxes, market maker fees, and the costs associated with tracking an index and charges it on an annualised basis to investors. Hence, ETFs which track a broad index are generally cheaper than funds with more complicated index methodologies.
What exposure an ETF can help you gain
An investment objective provides investors a return (before fees and expenses) that tracks the performance of the relevant index. You will find a short explanation of the asset, market, sector or theme the fund aims to gain exposure to on the ETF provider’s website and in the relevant Product Disclosure Statement (PDS). This allows investors to get an initial understanding of whether the ETF may suit their needs. For example:
“The Global X US 100 ETF (ASX: N100) seeks to invest in 100 of the largest non-financial companies listed on the US market. It focuses on innovation-driven companies, providing a growth tilt to core portfolio holdings. With a diverse range of companies spanning technology, consumer goods, healthcare, and more, investors gain access to Alphabet, Apple, Microsoft, and Tesla, as well as a range of healthcare giants and digital juggernauts whose products or services play a vital role in everyday life.”
The next step is to look at the underlying index an ETF invests in. If you are new to ETF investing, you can learn about indexes in our other article ‘X-Plained: What are ETFs?’. The index methodology will determine how the ETF is put together including what assets are included or excluded, the number of constituents, and how the index is weighted.
For a greater understanding of what companies or other assets are in an index, refer to the fund holdings. Being able to “look under the hood” is a key benefit of investing in index-tracking ETFs as the holdings are listed in detail. However, if you are looking at an actively managed ETF, there may be a delay in the availability of holdings data. As an example, the full list of N100’s holdings is available on the fund page.
A few additional factors to consider when selecting an ETF are its structure and whether it is currency hedged.
Physical versus Synthetic Structures
- Physical: Invests directly in the assets from the underlying index. For instance, N100 directly holds the shares in the Global X US 100 Index.
- Synthetic: Invests in derivatives to track the underlying index. For example, the Global X Global Carbon ETF (ASX: GCO2) holds futures contracts to gain exposure to the ICE Global Carbon Futures Index.
Currency hedging can help protect against exchange rate fluctuations when investing in international assets. However, it does mean you miss out of potential benefits when currency conditions are more favourable for local investors.
Which documents should you review before making an investment decision
Every retail investment product, including ETFs, are required to provide Product Disclosure Statements (PDS), because they contain vital information about the fund which will help you to determine whether it is suitable for your needs. It includes:
- Key features of the fund
- Investment objectives
- Index information
- Fees and costs
- Distribution frequency (if applicable)
- Risk factors
Check out the N100 PDS here.
The Target Market Determination (TMD) describes which type of investor an ETF is appropriate for. It includes a general summary as well as indicators on whether the fund will be suitable for an investor’s; investment objective, intended product use, risk and return profile, and liquidity. Explore the N100 TMD here.
Once you have a firm understanding of an ETF’s key information, you can start to research specific investment ideas which may suit your portfolio. You can learn more about ETFs by exploring our insights hub here.