Editor’s note: This article contains information only. It is not intended as personal or general advice. Your Money recommends seeking professional advice specific to your personal circumstances.
Australians love buying direct shares and property, but when it comes to other kinds of investment products, that enthusiasm can disappear.
Research shows that less than 20 per cent of investors feel confident investing in exchange-traded funds (ETFs), derivatives, bonds and hybrids, and another 30 per cent aren’t aware such products even exist.
So, why are Australians so wary of going beyond the mainstream, and who should get involved?
The much-bandied about term ‘alternative’ is frequently used by commentators and fund managers to describe a range of investment options beyond direct equities (stocks), bonds, cash and real property.
But lumping all ‘alternative’ products in the same bandwagon can be misleading.
While inexperienced investors should be wary of some investing tools, other products such as ETFs can be used to make a portfolio safer through diversification, according to ASX business development manager Rory Cunningham.
“Particularly self-managed super funds, it’s found that they’re underweight in key asset classes like international equities or fixed income,” Cunningham told Trading Day.
Before choosing what kind of investment tool works best, Cunningham says the first step is for investors to work out their current asset allocation and decide what they need more exposure to.
“It’s applicable to any investor in the market, getting that asset allocation right. Thinking about how long they want to be investing for and then matching that asset allocation to their investment horizon and or their risk,” he advised.
Once a plan is in place, here are some of the options investors might come across:
Managed funds and ETFs
Managed funds and exchange-traded funds (ETFs) are collections of different investments bundled together into one package.
They offer investors an easy way to buy a variety of investments across sectors and assets, including a range of alternative investments.
The difference here is that while managed funds are maneuvered to varying degrees by fund managers depending on the market, ETFs and other passive funds tend to follow the growth or decline of an index – without human interaction.
Founder of investment app Stockspot, Chris Brycki, says ETFs are quickly rising in popularity around Australia and the world as more people become aware of their potential.
“Five years ago, there was only about $8 billion in Australia invested in ETFs, today there’s over $40 billion. So it’s got to be one of the fastest growing areas of investment management,” told Trading Day.
“In the past, it was quite difficult to access some investments such as infrastructure and property. And ETFs just make it very convenient and cheap for people to have some of them in their portfolio.”
These funds might be bundled into stock market indices – such as funds that bundle all stocks in the ASX200 or S&P 500 – or focus on a region, such as the top rated companies in Asia. Beyond stocks, they can also provide investors access to asset classes as varied as gold, oil and even livestock.
Derivatives are complex financial products and include investment options such as futures, options or swaps.
Instead of purchasing an asset, an investor owns a contract which speculates on the price movement of an asset, a bundle of assets or an index – whether up or down.
Many people came to know about derivatives after the GFC where some investors used derivatives to essentially bet against the US housing market.
Derivatives were also used at the time to bundle risky mortgages with other safer ‘assets’, resulting in a surge of high-risk mortgages being offered by the banks.
While regulation has been added to reduce their risk to the market, Cunningham says only the more experienced investors should be looking at tapping into these.
“If you’re a beginning investor I don’t see a reason you need to get into these asset classes. Starting off with a good portfolio of ETFs is a great way to get into the market and get diversification across those key assets,” he advises.
A hybrid combines different types of financial instruments into one package, usually debt and equity.
Like derivatives, the value of hybrid securities are usually influenced by the price movements of an underlying stock.
According to the ASX, investors use hybrids to better diversify their portfolio by spreading investments across asset types and to profit from anticipated interest rate movements or equity prices – similar in this way to derivatives.
However, investment adviser Adam Dawes of Shaw and Partners says that, although they’re popular among investors and institutions, there are many risks for the uninitiated.
“There is a degree of understanding that you need to have, so its buyer beware. But if those are explained to the investor, I feel that it should be a pretty simple instrument,” said Dawes.
REITs and property funds
Australians have a love affair with property, but there’s more than one way to invest in the market.
Buying a property is how most people look to get into the market, but that can come with high upfront costs and can also be expensive.
Another option is to invest in a real estate investment trust (REIT) which is a company that owns and often operates different types of real estate, including apartments, hotels, hospitals and warehouses.
According to Brycki, these can be accessed via an ETF, a managed fund or via the banks. These can be either Australian or global property markets, or a combination of both.
“If you’re worried about Australia, you can avoid it completely and invest in the US or Japan and other countries. So there are different ways to access [property]. Property ETFs would probably be my favourite,” says Brycki.
For more on this topic, watch the video above.