Know your ETF

Passive

These are the most common ETFs and they track a benchmark (for example, index, sector or commodity). Their goal is to move in line with the underlying benchmark and provide a near identical return (less fees). The difference between the ETF’s return and the underlying benchmark’s return is called the “tracking error”. Fees with passive ETFs are typically lower than for active ETFs and managed funds. One of the biggest passive ETFs on the ASX is the SPDR S&P/ASX 200 (STW), which tracks the return of the S&P/ ASX 200 Index. It charges a fee of 0.19% and returned 8.81% in the year to August 2019, and 8.11%pa since inception in August 2001.

Active

These are less common and can be identified by the use of “hedge fund” or “managed fund” in their title. They are actively managed and aim to outperform a benchmark or follow an objective.

The WCM Quality Global Growth Fund (Quoted Managed Fund) (WCMQ), launched in August 2018, is an example of an ETF based on the same strategy as a managed fund that’s performed strongly. The Quality Global Growth strategy has outperformed the MSCI World Index by an annualised 5.2% over the past decade.

Smart Beta

These ETFs select shares according to certain rules-based factors or non-market capitalisation weighting (for example, value, minimum volatility, size, quality, yield, ethical). One of the largest listed on the ASX is the Vanguard Australian Shares High Yield ETF (VHY). It provides exposure to companies listed on the ASX that have higher forecast dividends relative to other ASX-listed companies. The management fee is 0.25% and the return for the year to August 2019 is 11.84% (9.18%pa since inception in May 2011).