WHAT IS AN EXCHANGE TRADED FUND?
An Exchange Traded Fund (ETF) is similar to a managed fund, except that it takes
the form of shares that can be traded openly on a share market - whereas a
managed fund can usually only be purchased and redeemed directly through the
services of a fund manager.
Many common ETFs have been established to track well-known market indices
and therefore do not rely on a fund manager's expertise in actively selecting shares.
CREATION OF AN ETF
To create an ETF, the ETF Manager will buy parcels of shares from many different
companies within a group, making a pool.
This pool of new shares is then collectively listed on the share market under its own ticker code.
EXAMPLE
SmartFONZ (FNZ.NZX) on the New Zealand Stock Exchange tracks the NZX50 Portfolio Capital Index.
The NZX50 Portfolio Capital Index measures the movement and returns of the top 50 listed companies in New Zealand.
Shares in the SmartFONZ ETF are created from the purchase of shares from each of the companies within the NZX50 Portfolio Capital Index.
These shares are then pooled and relisted as new shares in the ETF - SmartFONZ.
Accordingly, shares in SmartFONZ (FNZ) are highly likely to mirror the movement
and returns of the NZX50 Portfolio Capital Index (which is influenced by the
individual movements of the top 50 listed New Zealand companies).
Thereby, the singular purchase of SmartFONZ shares (FNZ) gives you an investment in the top 50 listed companies in New Zealand.
HINT: "FONZ" comes from the words "fifty" and "New Zealand" in "NZX50 Portfolio Capital Index".
As shown in the graph below, you can see how shares in SmartFONZ (FNZ) mirror
the movements of the NZX50 Portfolio Capital Index (Capital), as opposed to
Telecom Corporation of New Zealand shares (TEL).
Source: New Zealand Exchange (NZX), data collected by Direct Broking Limited.
Disclaimer
Investment products involve risks, including the potential loss of some or all
of the principal amount invested. The information displayed on this page does
not constitute a recommendation, opinion or guidance on the part of Direct
Broking on the suitability of any investment products to your investment
objectives. Any investment decision made by you will be based solely on your own
evaluation of your financial circumstances and investment objectives. If you are
uncertain about any aspect of an investment or the implications for you, Direct
Broking recommends that you seek expert advice from a financial adviser.
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