Question 1: I’m a bit puzzled by how an ETF (exchange traded fund) grows in size. I understand that for a listed ASX company, shares can be created by way of a capital raising or destroyed by a share buy-back, both of which would influence the share price, given the change in supply. So how does an ETF or Asset Manager achieve the same? I can see that dividends paid to the ETF may not be fully distributed but invested, but how can it otherwise grow or contract if units are only traded on the ASX one for one?
Answer: An ETF (or quoted managed fund) grows or contracts because it (via a market maker) becomes the main buyer or seller of units on the ASX. When you purchase an ETF on the ASX, the seller will often (but not always) be the Fund itself. It then creates those units. Conversely, if you sell units on the ASX, the buyer will often (but not always) be the Fund itself. Those units are then cancelled.
The ETFs either do this directly (they engage a market maker to enter bid and offer quotes on the ASX), or indirectly through a broker who provides the same service, but has access to the Fund to do bulk creations/redemptions of units.
It is this activity of the Fund either making a market directly, or engaging a broker to make a market, that helps keep the unit price trading around NTA (net tangible asset value).
Question 2: With regards to an entitlement offer, do shares purchased on the record date get included into the registry holdings that same day, or does that happen at settlement on T+2 days?
Answer: Ignore the ‘record date’ – it’s a date only used by the registry – not the market.
Use the ‘ex’ date for entitlements/dividends etc…you must buy (trade on the ASX) no later than the day before it trades “ex-dividend” or “ex-entitlement”.
Question 3: My wife has generously delivered me two baby boys in the last couple of years (thankfully not twins). I am putting some money away for them regularly into a bank account in their names each month that pay interest currently 1.1% on the balance, with a further bonus of another 1% if the balance is added to each month, making it 2.1% interest paid monthly. My question is: should I be looking at an alternative investment strategy for my sons perhaps in a managed fund or the like and if so, can you recommend one that would suit this situation? I aim to contribute $200 a month into each of their accounts (finances permitting).
Answer: I’d be looking at insurance bonds (such as Centuria’s LifeGoals). I think they are ideal vehicles for saving for children. Here are some links to three stories that review the different saving options. https://switzersuperreport.com.au/investing-for-your-kids-or-grandchildren-part-1/
https://switzersuperreport.com.au/investing-for-your-kids-or-grandchildren-part-2-2/
https://switzersuperreport.com.au/centurias-investment-bonds-hit-the-mark/
Question 4: I’ve been looking at infrastructure ETFs like Magellan (MICH) and Vanguard (VBLD), after a good run for six months, they’re trading flat of late. Given that interest rates are likely to fall further and remain lower for longer, why are they not continuing to trend upward?
Answer: I think it is most likely a function of two factors – firstly, there are other things apart from interest rates that go into the pricing of infrastructure assets, most particularly, revenues. The fall in interest rates has had no impact on the assets’ revenues. Secondly, markets are anticipatory – the move down in intertest rates in the USA started in effect last December when the Fed started using the word “patience”. The move in Australia has been more recent – but remember, these are funds investing in global infrastructure assets.
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