An ETF is a managed fund that you can buy or sell on an exchange, like the Australian Securities Exchange (ASX).In Australia, most ETFs are passive investments that don’t try to outperform the market. The role of the fund manager is to track the value of an index, for example the ASX200 or S&amp;P500 or a specific commodity, such as gold. The value of the ETF goes up or down with the index or asset they’re tracking. Types of ETFs

ETFs are available for a range of asset classes and individual assets. These include:

Some products track an index or asset and ‘look’ like an ETF. But they’re not ETFs and they can be riskier. These products include:

There are also exchange-traded managed funds and exchange traded hedge funds. With these, the investment manager tries to outperform an index and may use high-risk trading strategies.

Weigh up the pros and cons before you invest in ETFs.

Diversification — ETFs allow you to buy a basket of shares or assets in a single trade. This can help to diversify within an asset class. ETFs also allow you to invest in markets or assets it can be difficult or expensive to access. You can also diversify across ETFs so there’s less chance of loss if an ETF provider collapses.Transparency — ETFs publish the net asset value (NAV) daily on the ASX. This can help you track how the underlying asset are performing and if the price of the ETF is close to the NAV.Low cost — a lot of ETFs have a low management expense ratio (MER). They’re usually cheaper than most actively managed funds.Easy to trade — you can buy and sell ETFs during the trading hours of the exchange.

Market or sector risk — while ETFs can help you diversify, the market or sector the ETF is tracking could fall in value. For example, if the ASX200 declines, the value of your ETF investment will also fall.Currency risk — if the ETF invests in international assets, you face the risk of currency movements impacting your returns. Some ETFs are ‘currency hedged’ which removes this risk.Liquidity risk — some ETFs invest in assets that are not liquid, such as emerging market debt. This can make it difficult at times for the ETF provider to create or redeem securities.Tracking errors — an ETF’s price can move away from the value of the index or asset it’s designed to track. This can be due to illiquidity of the underlying assets, fees, taxes and other factors. This means you could buy or sell when it’s not trading at the net asset value(NAV).

You can buy and sell units in an ETF through a stockbroker. It’s the same as buying and selling shares.Settlement of trades takes place two business days after you buy or sell the ETF. You have to pay brokerage fees when you buy or sell an ETF.

You can check if an ETF is fairly priced by comparing its price on the ASX with the NAV. The NAV is calculated by taking the assets of the fund, subtracting the liabilities and dividing this by the number of units in the fund.ETF providers give updates of the NAV:

Most ETFs also provide real-time NAV updates. These are called indicative or intraday NAV (iNAV). You can use an iNAV as a reference point during the day to understand if an ETF you’re buying or selling is at or close to the NAV per unit. You can see the latest iNAV from your broker by adding ‘Y’ before the ETF ticker. For example ‘YABC’ for the ETF ticker ‘ABC’.

To get an ETF price that trades closer to the NAV, place your trades at least 30 minutes after the market opens.It’s also better to buy or sell ETFs when the market for the underlying asset is open. For example, if you’re an ETF that tracks Asian shares, place your orders when the Asian sharemarket is open.Check the product disclosure statement before you investA product disclosure statement (PDS) contains a lot of information you’ll need to know about an ETF. It includes information on:

If you have questions about an ETF you can contact the fund manager or get financial advice.

Why you should invest in ETFs

why-you-should-invest-in-etfs

Leverage results from using borrowed capital as a funding source when investing to expand the firm's asset base and generate returns on risk capital. Leverage is an investment strategy of using borrowed money specifically, the use of various financial instruments or borrowed capital to increase the potential return of an investment.&nbsp;Leverage can also refer to the amount of debt a firm uses to finance assets.

Leverage is the use of debt (borrowed capital) in order to undertake an investment or project. The result is to multiply the potential returns from a project. At the same time, leverage will also multiply the potential downside risk in case the investment does not pan out. When one refers to a company, property, or investment as "highly leveraged," it means that item has more debt than equity.&nbsp;The concept of leverage is used by both investors and companies. Investors use leverage to significantly increase the returns that can be provided on an investment. They lever their investments by using various instruments, including options, futures, and margin accounts. Companies can use leverage to finance their assets. In other words, instead of issuing stock to raise capital, companies can use debt financing to invest in business operations in an attempt to increase shareholder value.&nbsp;Investors who are not comfortable using leverage directly have a variety of ways to access leverage indirectly. They can invest in companies that use leverage in the normal course of their business to finance or expand operations—without increasing their outlay.“Leverage amplifies possible returns, just like a lever can be used to amplify one's strength when moving a heavy weight.”&nbsp;

Through balance sheet analysis, investors can study the debt and equity on the books of various firms and can invest in companies that put leverage to work on behalf of their businesses. Statistics such as return on equity (ROE), debt to equity (D/E), and return on capital employed (ROCE) help investors determine how companies deploy capital and how much of that capital companies have borrowed.To properly evaluate these statistics, it is important to keep in mind that leverage comes in several varieties, including operating, financial, and combined leverage.&nbsp;Fundamental analysis uses the degree of operating leverage. One can calculate the degree of operating leverage by dividing the percentage change of a company's earnings per share (EPS) by its percentage change in its earnings before interest and taxes (EBIT) over a period.&nbsp;Similarly, one could calculate the degree of operating leverage by dividing a company's EBIT by EBIT less interest expense. A higher degree of operating leverage shows a higher level of volatility in a company's EPS.&nbsp;DuPont analysis uses the "equity multiplier" to measure financial leverage. One can calculate the equity multiplier by dividing a firm's total assets by its total equity. Once figured, one multiplies the financial leverage with the total asset turnover and the profit margin to produce the return on equity. For example, if a publicly traded company has total assets valued at $500 million and shareholder equity valued at $250 million, then the equity multiplier is 2.0 ($500 million / $250 million). This shows the company has financed half its total assets by equity. Hence, larger equity multipliers suggest more financial leverage.&nbsp;If reading spreadsheets and conducting fundamental analysis is not your cup of tea, you can purchase mutual funds or exchange-traded funds (ETFs) that use leverage. By using these vehicles, you can delegate the research and investment decisions to experts.

Margin is a special type of leverage that involves using existing cash or securities position as collateral used to increase one's buying power in financial markets. Margin allows you to borrow money from a broker for a fixed interest rate to purchase securities, options, or futures contracts in the anticipation of receiving substantially high returns.&nbsp;You can thus use margin to create leverage, increasing your buying power by the marginable amount for instance, if the collateral required to purchases $10,000 worth of securities is $1,000 you would have a 110 margin (and 10x leverage).

Leverage is a multi-faceted, complex tool. The theory sounds great, and in reality, the use&nbsp;and losses. If an investor uses leverage to make an investment and the investment moves against the investor, their loss is much greater than it would've been if they have not leveraged the investment.&nbsp;For this reason, leverage should often be avoided by first-time investors until they get more experience under their belts. In the business world, a company can use leverage to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroy shareholder value.

A company was formed with a $5 million investment from investors, where the equity in the company is $5 million this is the money the company can use to operate. If the company uses debt financing by borrowing $20 million, it now has $25 million to invest in business operations and more opportunity to increase value for shareholders.&nbsp;An automaker, for example, could borrow money to build a new car factory. The new factory would enable the automaker to increase the number of cars it produces and increase&nbsp;profits.

What is leverage?

what-is-leverage

What Is Dollar-Cost Averaging (DCA)?&nbsp;

Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset's price and at regular intervals.&nbsp;In effect, this strategy removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices. Dollar-cost averaging is also known as the constant dollar plan.&nbsp;

Understanding Dollar-Cost Averaging (DCA)&nbsp;

Dollar-cost averaging is a tool an investor can use to build savings and wealth over a long period. It is also a way for an investor to neutralize short-term volatility in the broader equity market. A prime example of dollar-cost averaging is its use in superannuation plans, in which regular purchases are made regardless of the price of any given equity within the account.&nbsp;In a superannuation plan, an employee can select a pre-determined amount of their salary that they wish to invest in a menu of funds. When an employee receives their pay, the amount the employee has chosen to contribute to the superannuation is invested in their investment choices.&nbsp;Dollar-cost averaging can also be used outside of superannuation plans, such as mutual or index fund accounts. Although it's one of the more basic techniques, dollar-cost averaging is still one of the best strategies for beginning investors looking to trade ETFs.&nbsp;Additionally, many dividend reinvestment plans allow investors to dollar-cost average by making contributions regularly.&nbsp;

Real-World Example of Dollar-Cost Averaging&nbsp;

Joe works at ABC Corp. and has a superannuation plan. He receives a paycheck of $1,000 every two weeks. Joe decides to allocate 10% or $100 of his pay to his employerʼs plan. He chooses to contribute 50% of his allocation to a Large Cap Mutual Fund and 50% to an ASX200 Index Fund. Every two weeks 10%, or $100, of Joeʼs pre-tax pay will buy $50 worth of each of these two funds regardless of the fund's price.&nbsp;The table below shows half of Joe's $100 contributions to the S&amp;P 500 index fund over 10 pay periods. Throughout ten paychecks, Joe invested a total of $500, or $50 per week. However, because the price of the fund increased and decreased over several weeks Joeʼs average cost of purchase is lower than the fundʼs highest prices. This allowed Joe to take advantage of the fluctuations of the market as the index fund increased and decreased in value. This results in Joe buying below the average price.

It is important to note that this example of the dollar-cost averaging strategy works out favorably because the hypothetical results of the ASX200 Index fund ultimately rose over the period of time in question. Dollar-cost averaging does improve the performance of an investment over time, but only if the investment increases in price. The strategy cannot protect the investor against the risk of declining market prices.&nbsp;The general idea of the strategy assumes that prices will, eventually, always rise. Using this strategy on an individual stock without knowing about the company's details could prove dangerous because the strategy may encourage an investor to continue buying more stock at a time when they should simply exit the position. For less-informed investors, the strategy is far less risky on index funds than on individual stocks.&nbsp;Investors who use a dollar-cost averaging strategy will generally lower their cost basis in an investment over time. The lower cost basis will lead to less of a loss on investments that decline in price and generate greater gains on investments that increase in price.&nbsp;

Dollar-cost averaging is an approach to investing that involves periodically investing a set amount of money regardless of the market price of the securities being purchased. It is often associated with passive investing strategies in which the investor wants to minimize the time they must spend in administering their portfolio. Although dollar-cost averaging can be applied to all types of securities, it is most commonly used in relation to pooled investment vehicles such as mutual funds, index funds, and exchange-traded funds (ETFs).&nbsp;

Why Do Some Investors Use Dollar-Cost Averaging?&nbsp;

The key advantage of dollar-cost averaging is that it reduces the effects of investor psychology and market timing on their portfolio. By committing to a dollar-cost averaging approach, investors avoid the risk that they will make counter-productive decisions out of greed or fear, such as buying more when prices are rising or panic-selling when pricesdecline. Instead, dollar-cost averaging forces investors to focus on contributing a set amount of money each period while ignoring the price of each individual purchase.&nbsp;

What Is an Example of Dollar-Cost Averaging?&nbsp;

An example of a dollar-cost averaging approach would be investing $500 per month in an index fund that tracks the performance of a broad market index, such as the ASX 200. In some months, the index will be priced high, meaning fewer shares would be purchased for the $500 investment. In other months, when the index is low, $500 would purchase a greater number of shares.&nbsp;In the long run, however, investors who use a dollar-cost averaging strategy are betting that the simplicity of the strategy, combined with the fact that it protects them from the temptation of buying high and selling low, will ultimately lead to better results than trying&nbsp;to time the market on each purchase.

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Brad Kester

Why you should invest in ETFs

Exchange-traded funds (ETFs) are a low-cost way to diversify your investments and outperform the world’s hedge funds without the risk and time commitment.

Brad Kester

What is leverage?

Brad Kester

Dollar cost averaging explained

The method of dollar-cost averaging reduces investment risk, reduces the emotional component of investing and avoids bad timings of purchases.