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On this episode of The nestegg Podcast, host Maja Garaca Djurdjevic and three experts discuss the latest in equities, property investing and super.

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Steve Waters, director of Right Property Group, chats about the latest in property, including the much-talked-about use of macro-prudential measures to cool the rapidly expanding market.

RMIT’s senior lecturer of finance, Dr Angel Zhong, talks about soaring ETFs, what they are and why young investors, in particular, are jumping onboard their latest surge. Dr Zhong also takes a closer look at BNPL platforms.

And lastly, tax and super guru Timothy Munro gives his thoughts on Prime Minister Scott Morrison’s choice to backtrack on any further SG changes and looks at the impending end of the low and middle income tax offset.

Have a question for our experts? Get in touch at [email protected] and you might get featured on the next episode.

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The risky side of ETFs

By Tim Stewart and Killian Plastow

May 19 2017
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Invest

The risky side of ETFs

By Tim Stewart and Killian Plastow
May 19 2017

Exchange traded funds, or ETFs as they’re more commonly known, are becoming increasingly popular among SMSF trustees and investors looking to diversify, but financial consultancy Organic Financial Group cautions these products can have “significant weaknesses”.

ETF, exchange traded fund, Organic Financial Group, Gary Norden, index fund, investment advice, financial literacy, financial education, portfolio construction, portfolio diversification,

The risky side of ETFs

By Tim Stewart and Killian Plastow

May 19 2017
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Speaking to Nest Egg’s sister site InvestorDaily, Organic Financial Group’s founder Gary Norden said ETFs have “never been tested in a difficult environment”, and changes in the market environment could have serious implications for ETF investors.

“The last few years have been very benign for markets, and we know from people we’re talking to in the industry ... a lot of the testing of these products is really going on in that benign market,” Mr Norden said.

“You could have ETFs on the S&P 500 that are constructed completely differently. We’ve seen that, we’ve seen some that are constructed with an almost opposite view to another one. Those kinds of things we find interesting because they open up vulnerabilities.”

One reason this can happen, Mr Norden said, is because some ETF providers “make short cuts” in order to offer a low-cost product.

“For example, ETFs on S&P 500 in the US, many of them will not absolutely buy the 500 stocks and weight them as they should be in the S&P 500,” he said.

“Different styles of ETF are constructing their portfolios to mirror the S&P 500 in different ways. The people buying those ETFs are probably not aware of that they’re buying an S&P 500 ETF. It’s mirroring the returns, but people think they’re matching the market.”

This isn’t to say ETFs are risky products or they don’t have benefits. They have a number of benefits, but many investors aren’t thinking deeply [about] the structure and risks associated with the product, Mr Norden said.

“Any market that grows as large as quickly as the ETF market has should be constantly tested, but it’s hard because the industry generates a lot of revenue,” he said.

“It’s important that when people look at the benefits of ETFs, and there are benefits, but you’ve got to be looking at the long-term sustainability of the product – does it work in every market condition? How does it react?”

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