From our friends over at Vanguard, this article delves into the various acronyms you might encounter in the investing world, particularly focusing on exchange traded funds (ETFs) and managed funds (MFs).
Why You Should Mind Your ETPs and Other Investing Acronyms
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 they 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 invest in hundreds, and sometimes thousands, of companies listed on different share 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 a single market trade.
MFs: (Managed Funds)
MFs stands for managed funds. Similar to an ETF, a managed fund 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 are 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.
Other Fund Acronyms
PDS: (Product Disclosure Statement)
PDS stands for product disclosure statement. All investment funds, whether listed or unlisted, must provide a PDS that includes specific information about the product, including its key features, 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 contrast, 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.
General Advice Warning
Vanguard is the product issuer and the Operator of Vanguard Personal Investor. Vanguard Super Pty Ltd (ABN 73 643 614 386 / AFS Licence 526270) is the trustee of Vanguard Super (ABN 27 923 449 966) and the issuer of Vanguard Super products. We have not taken your objectives, financial situation or needs into account when preparing this report so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs and the disclosure documents of any relevant Vanguard financial product before making any investment decision. Before you make any financial decision regarding a Vanguard financial product, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard’s financial products can be obtained at vanguard.com.au free of charge and include a description of who the financial product is appropriate for. You should refer to the TMD of a Vanguard financial product before making any investment decisions. You can access our IDPS Guide, Product Disclosure Statements, Prospectus and TMD at vanguard.com.au or by calling 1300 655 101. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This report was prepared in good faith and we accept no liability for any errors or omissions.
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