In our last lesson we took a look at what an ETF is, and saw that ETFs can cover almost all asset classes like Shares, cash and commodities. The asset types that ETFs invest in is just one part of the story. The second part of the story is the investment management approach that the ETFs take. In the next few lessons we’ll take a look at the different investment management types that ETFs can follow.
In this post we’ll cover in summary the different management types, followed by the detail in the following posts.
The three main ETF types are Index or Passive, Smart or Strategic Beta and Active ETFs. We take a brief look at each below:
Index ETFs are the traditional ETFs which simply aim to replicate an index.
The index that they replicate is built on market capitalisation weightings. For example the flagship index in Australia, the S&P/ASX 200 Index consists of Australia’s largest 200 ASX listed companies, weighted according to their market capitalisation. If Commonwealth Bank’s company size represents 10% of the top 200 companies, they will form 10% of the index.
Index ETFs are the most popular ETF type and tend to be the lowest cost. Find out more about Index ETFs.
Smart Beta ETFs aim to replicate an index that is built on alternate factors to a standard market capitalisation index.
These indexes can cover a broad array of factors such as ethical factors, alternate weightings of companies, market thematics or financial factors.
Smart Beta ETFs have become more popular in recent times. They tend to be higher cost than Index ETFs. Find out more about Smart Beta ETFs.
Active ETFs aim to outperform an index, and use the fund manager’s skills in order to attempt to outperform.
There’s currently not a huge amount of Active ETFs on the ASX, but they are growing in popularity. They tend to be the highest cost of the ETFs available on the ASX. Find out more about Active ETFs.
The above was a quick insight into the main three ETF types. In the following lessons we cover each in more detail. Get started on learning more about Index ETFs now.