Understand the differences between ETFs, MFs, and other common fund terms…
Let’s face it, the investing world seems to thrive on the use of acronyms.
Understanding exactly what they stand for can go a long way in expanding your financial literacy and helping you to make better and more informed investment decisions over time.
The list of investing acronyms is quite vast, covering everything from general financial and accounting terms to different types of investment securities, market indexes, industry regulators and organisations.
For the purposes of this article, we will just focus on acronyms that specifically relate to investing in exchange traded funds and managed funds.
ASX: (Australian Securities Exchange)
This is the logical place to start the acronyms exercise, because essentially the majority of Australian-listed fund investment avenues ultimately lead to the Australian Securities Exchange (the ASX). The role of the ASX is to enable the trading of shares and other types of investment securities, including the units of listed fund products.
ETPs: (Exchange Traded Products)
ETPs stands for exchange traded products. It’s a broad term that covers the products traded on share markets, but not individual shares or other securities. The most common type of ETPs are ETFs, which are covered below, but thy also include products enabling trading in currencies, debt securities, and commodities. There are currently more than 350 ETPs available for investors on the ASX.
ETFs: (Exchange Traded Funds)
ETFs stands for exchange traded funds. An ETF is a professionally managed, share market-listed investment fund that is bought or sold on exchanges such as the ASX in the same way as company shares. ETFs often invests in hundreds, and sometimes thousands, of companies listed on different shares markets. Other types of ETFs invest in bond issues or other asset classes, including property and infrastructure. ETFs are generally an easy way for investors to gain broad exposures to different types of investments in single market trade.
To learn more about ETFs, click here.
MFs: (Managed Funds)
MFs stands for managed funds. Similar to an ETF, a managed funds pools together money from different investors to invest in different types of assets, such as shares and bonds. Some MFs are listed on the share market, however the majority are not listed and only available for investment directly through product owners such as Vanguard, or via financial advisers. Just like ETFs, MFs are open-ended funds, which means the number of units they have on issue at any point is not fixed. New units can be created when investors buy into the fund, or existing units can be taken out of circulation when investors sell their units. This contributes to strong liquidity for investors. But there are important differences between ETFs and MFs.
To learn more about the similarities and differences between managed funds and ETFs, click here.
Other fund acronyms…
PDS: (Product Disclosure Statement)
PDS stands for product disclosure statement. All investment funds, whether a listed or unlisted, must provide a PDS that includes specific information about the product, including its key geatures, its investment strategy and return objectives, its level of risk and who it might suit, its management fees and any other costs, taxation information, and other relevant details to help investors make an informed investment decision.
AUM: (Assets Under Management)
AUM stands for assets under management. This is the total amount of money being managed by a particular fund on behalf of its investors. Some ETFs and managed funds have billions of dollars of AUM, while others have significantly smaller amounts, which can relate to their investment performance, their investment strategy, or both. A fund’s AUM will rise or fall based on asset price fluctuations and on investor inflows or outflows. Funds with a larger AUM will typically provide strong trading liquidity for investors.
NAV: (Net Asset Value)
NAV stands for net asset value, which is the value of a fund’s total assets minus its total liabilities. This net amount is divided by the number of fund units on issue to calculate the NAV price per fund unit (which is similar to a share price). The intra-day NAV price on an ETF will typically fluctuate during market trading sessions based on trading movements. By contract, the NAV price on unlisted managed funds is calculated daily at the close of each market trading session.
MER: (Management Expense Ratio)
MER stands for management expense ratio. An investment fund’s MER is a ratio that includes total annual management fees and other expenses such as transaction charges, account fees and other operating costs. It’s normally shown as a percentage of every dollar invested. An MER does not include other external costs, such as stock brokerage fees and certain taxes.
DRP: (Distribution Reinvestment Plan)
DRP stands for distribution reinvestment plan. Many ETFs and managed funds offer investors the choice of receiving income distributions as cash or reinvesting distributions to purchase additional units in the fund through a DRP. Choosing the DRP option can significantly compound both capital growth and income returns over time. Another key advantage of a DRP is that no brokerage fees are applied when adding fund units to an existing holding, meaning lower investment costs and higher returns.
To learn more about the different types of investments available through ETFs and managed funds, click here.