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This commentary is written by Vanguard Principal, Corporate Affairs & Market Development Robin Bowerman. The title is Why ETFs in tough markets?

It was first published on Tuesday 10 July 2012

And is read by Michael Mullins

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.

Despite the difficult investment markets, the market capitalisation of Exchange Traded Funds (ETFs) trading on the Australian Securities Exchange (ASX) grew by almost 9 percent to more than $5 billion during the 12 months to May.

And the latest ETF Monthly Report (PDF), published by the ASX, records that the number of ETFs trading on the ASX increased from 48 to 59 over that period. (These figures do not include exchange traded commodities).

The reasons for the resilience of the ETF market during these tough market conditions would mirror, to a large degree, the reasons why many investors choose to invest through ETFs in the first place.

The 2012 issue of the Vanguard®/Investment Trends Self Managed Super Fund Report found that the two most common motivations for SMSFs to invest in ETFs are to diversify their portfolios and to invest at a low cost.

Incidentally, the researchers found that half of the investors in ETFs invest through their self-managed funds.

The most popular “triggers” for SMSFs to invest in ETFs, according to this research, are to diversify their portfolios (77 percent), to invest at a low cost (53 percent) and to access overseas markets (40 percent).

Among the other reasons that SMSFs give for investing in ETFs are to improve liquidity/ease of sale (32 percent), to avoid the risks from individual stocks (28 percent), to provide a core for an investment portfolio (20 percent) and that ETFs have trading flexibility (19 percent).

Other reasons given for investing in ETFs include: transparency of underlying investments (10 percent) and the ability to quickly rebalance a portfolio (9 percent). Multiple answers were permitted in the survey conducted.

The transparency of the underlying investments and the ability to quickly rebalance a portfolio are also considered relevant to many SMSFs investing in ETFs, the researchers found.

Diversifying a portfolio while keeping a close control on investment costs are, of course, among the key principles of sound investment practice. This is particularly highlighted during difficult markets.

And that concludes the column

Why ETFs in tough markets?

from Robin Bowerman,  Principal, Corporate Affairs & Market Development at index fund manager Vanguard Investments Australia

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Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.