Over time, several myths and misconceptions have developed around ETFs. There are a few reasons why this has happened.
One is a lack of understanding. Many investors do not fully understand how ETFs work or the different types of ETFs available. As a result, they may believe false information or myths about ETFs.
Another reason is that there is confusion around mutual funds. ETFs are often compared to mutual funds, but they have significant differences, leading to confusion.
Marketing and media have been other factors. Some ETF providers or media outlets may promote myths or exaggerations about ETFs to attract investors or generate clicks and/or views.
People may also be biased against ETFs based on personal experiences or preferences. These biases can lead to myths and misunderstandings.
Capital markets specialist Damien Sherman says one of the most common misconceptions is that all ETFs are indexed.
“They definitely started that way, both in the US and here in Australia,” he tells Professional Planner.
“But now, the products have grown into being able to support actively managed ETFs. So that’s a key misconception.”
Some believe that active ETFs are only relevant in the US market. This is another myth. The rise of active ETFs is not actually constrained to a single market. While the US is leading the way as of 2021, active ETFs account for 25 per cent of exchange-traded products in Australia, up from 15 per cent in 2017. Many active ETF launches occurred in Australia in 2021, with equity strategies accounting for most new products.
Another myth is that active ETFs are expensive. In reality, the total expense ratios (TERs) for passive ETFs vary and range from below 0.10 per cent to over 0.60 per cent. While specifics may differ from fund to fund, the price points of active ETFs are generally comparable with those of passive strategies. Usually, core investments, such as global equities, are cheaper than more complex strategies, such as thematic ETFs.
Most people believe an ETF share price varies every day, according to RFS Advice director of financial services Troy Theobald, but ETF prices are actually calculated at the end of each day and will trade on that price the following day, just like a managed fund.
“This can allow for arbitrage plays hence it can trade at a discount to value of the underlying holdings,” Theobald says.
“Investors can’t see the fees other than the transaction fee to buy the security on the market so often think there are no fees.”
Theobald says the fees are built into the price and replicate the costs of managed options or index options.
“ETFs pay dividends but you need to know their schedule as it won’t necessarily be when the underlying shares have paid theirs; similarly with franking credits.”
Some individuals believe active ETFs are less liquid and more expensive to trade, but trading active ETFs in terms of liquidity and price is actually no different from passive ETFs. Dedicated capital markets teams will support good active ETFs with decent technology platforms, strong relationships, and a diversified set of authorised participants (APs). ETF providers must demonstrate that they can provide APs with all the information they need to consistently deliver efficient pricing while utilising primary and secondary markets to boost liquidity.
Active ETFs not being suitable core investments is yet another myth that has developed over time. In fact, they can help investors build out the strategic core of their portfolios, and adding active ETFs to a portfolio allows diversification of products and ETF providers. They also provide opportunities to enhance passive core performance.
ETFs offer investors a valuable means of diversifying their portfolios with low fees and ease of trading; however, as with any investment, myths and misconceptions can cloud the decision-making process. Once the myths and misconceptions have been dispelled, a clearer picture of ETFs will emerge.
