SMSF News - edition 19

Two types of ETFs

Most ETFs buy the shares and other investments that they are trying to match - they're known as standard or 'physical' ETFs. While you won't personally own the shares that the ETF buys, you will usually own units or shares in the ETF. Your main investment risk is the performance of the ETF's underlying shares and other assets, though other risks are discussed below.

The other type of ETF, known as a 'synthetic ETF', may or may not directly own the underlying shares or other assets and uses complex products called derivatives to track their performance, before fees. In Australia, only a handful of synthetic ETFs are currently available. They're required to include the word 'synthetic' in their title, so you can easily identify them.

Synthetic ETFs may be used by investors when it's impossible or expensive to buy, hold and sell the underlying investment in another way. Synthetic ETFs' prices should closely match changes in the value of their underlying investments with minimal 'tracking errors', before fees and taxes.

Sections within Exchange traded funds

• What are ETFs?
• Two types of ETFs
• Risks to consider