Exchange Traded Funds (ETFs) are funds based on portfolio holdings which you can trade on the stock market in real time. They’re structured on the basis of a particular index, sector, or class of stocks like blue chips. Exchange Traded Funds are now managing about a trillion dollars worth of holdings in the US. As everyone in the Self Managed Superannuation Funds (SMSF) industry will agree, good ROI needs to take into account all the options.

The original ETFs created in the 90s were high value units, and these units took a battering in the 2008- 2009 crash. More recent ETF issues have been lower valued units aimed at establishing volume based investments. Ironically, the move to lower unit values also encouraged a lot more trading, so these have become very good traders, many with very high volumes.

For SMSF purposes, the potential capital management values are good. These funds also do splits and pay dividends, often quite good dividends, helpful for cashflow. ETFs aren’t as sensitive as individual stocks, and their unit values usually don’t change as drastically or as rapidly as stocks.

Exchange Traded Funds Basics
These are the fundamentals about ETFs:
• ETFs can be bought by prospectus or on the market.
• The unit values are based on an average.
• Portfolios are often weighted with selected stocks within the framework of the index or sector.

Types of ETFs
There are various different species of ETFs. These are basic categories:
• Index based: These ETFs follow an index like the Dow, or other selected stocks. They usually offer a premium over the returns on the index.
• Short ETFs: These are short sellers. They’ve been controversial because of the furor over stock market short selling in the wider market, and because some short ETFs didn’t act according to their returns advice.
• Multiple return based: A typical multiple return based ETF will advertise a return of multiples on a given index.
• Sector-specific ETFs: These are specialist ETFs in areas like energy, defense, aerospace, etc.

In addition, many ETFs are “hybrid” schemes like a blue chip ETF which advertises return in multiples on the index, or similar variations.
Investing in ETFs

ETFs are often complex, but they spell out their investment plans clearly. That’s a big advantage over their main competition, the traditional mutual funds. They’re so successful as competition, in fact, that even the big players like Deutsche Bank and the mutuals themselves are getting in on the ETF action, and have started ETFs of their own. That’s not flattery. The ETFs have trading advantages, in that they can benefit from day trading margins, like stocks. Those margins can be quite impressive, too.

An interesting point about ETFs is their relative resilience. When the US mortgage crisis hit, the mortgage based ETFs went down like rocks, until someone noticed they were holding AAA rated mortgages, after which they went straight back up. Traders who knew the portfolio did very well out of that.

ETFs can be a valuable part of DIY superannuation when you’ve done your research and learned how to read performance. Don’t overlook this potentially valuable option.