I’ll be the first to admit that when I started investing in ETF’s I didn’t know the majority of the 10 terms in this post (or if I did know them I didn’t know enough about them). Not fully understanding these terms at the start of my investing journey set me back as I wasn’t confident in my investment strategy. I also found myself constantly finding things out the hard way like….
Where do I get my tax statements? (From my share registry it turns out, but I didn’t know what that was initially)
Why aren’t my dividends reinvested automatically? (I didn’t know this wasn’t automatic and that I had to do this through my share registry)
Why have I been taxed a tonne? (I didn’t know that I had to put in my tax file number in my share registry)
It took a steep 6 month learning curve of actively getting financially literate before I caught up, and became the consistent and confident investor I’ve become today.
The terms below are a list of the top 10 terms I wish I had understood fully before investing. They in no way represent everything you should know before investing, and I encourage you to seek out as much information as you can. A good place to start is to head on over to your country’s share/stock exchange website. Most exchanges have great free educational tools to get yourself ready to invest. The ASX (Australian Share Exchange) even has a free online course on ETF’s that I recommend doing once you’ve read this post.
- Exchange Traded Fund (or ETF)
ETF’s or Exchange Traded Funds are similar to mutual funds in some ways, but are traded like a stock/share on an stock exchange. One difference between shares and ETF’s is that when you purchase an ETF they are referred to as units rather than shares. For example you purchase 50 units of an ETF (not 50 shares of an ETF).
ETF’s themselves are investment funds that are designed to track the performance of an asset (or assets). For example an ETF could track the performance of of a share price index (eg the Total US Market, or the Top 300 Companies listed on the ASX). ETF’s can also give you exposure to a group of equities which can give you instant diversification. This instant diversification is one of the reasons why ETF’s are so popular, and a highly popular choice for investors. If you would like to read more about ETF’s head on over to the post ‘An easy guide to Exchange Traded Funds or ETF’s‘.
- MER or Management Expense Ratio
All Exchange Traded Funds or ETF’s pass on management fees to its investors. The MER is a % calculation of the total management fees and operating costs of the ETF. The MER is paid annually, and is calculated by dividing the operating costs by the average dollar cost of the assets held by the ETF. It’s important to know the MER when doing your research on potential ETF’s to invest in as this will eat into any returns that you have. That said you shouldn’t invest in an ETF just because the MER is low, and is only one aspect of any research into a potential ETF. Typically the the MER on passively managed ETF’s should be around 0.2% according to investopedia.
- CHESS Sponsored
When selecting an Investment Broker (such as Pearler, Self Wealth, CommSec, or any of the many brokers out there) you need to understand the two different ways that you can hold ETFs (or shares). There are two options for registering your ETF or share holding; on a CHESS sub register or on an issue sponsored sub register (also called a Custodian model). If your investment platform is CHESS sponsored then you will be allocated a HIN number and the ASX keeps a list of who owns each share/ETF. Purchasing ETF’s or shares under a CHESS Sponsored broker means that the ASX has a record of your ownership, and you own your ETF’s or shares directly (rather than someone holding them on your behalf eg in the Custodian Model). The ASX has written a great fact sheet on the two different holding options here, and I encourage you to read more about this to understand which one works for you.
- HIN or Holder Identification Number
The HIN or Holder Identification Number acts like an account number and is provided to you by your CHESS Sponsored investment broker when you set up your account with them. This number is used to track your ownership of ETF’s or shares. You can buy and hold multiple ETF’s or shares under one HIN. It’s important to keep your HIN number and any documentation you are sent relating to this number safe and secure as this will help you manage the administration relating to investing.
- Custodian Model (Issue Sponsored Sub Register)
If your brokerage platform operates under a Custodian Model then your ETF’s (or shares) will be registered on an issue sponsored sub register. These brokers hold your ETF’s or shares on your behalf, and keeps their own register of your holdings (the ASX doesn’t keep a register of your individual holdings under this model as the broker holds these on your behalf). For each holding in a Custodian Model you will be provided an SRN or Securityholder Reference Number. To read more about the different options for holding shares view this link here from the ASX website.
- SRN or Securityholder Reference Number
SRN’s are allocated for each holding under a Custodial model, which is allocated by the company that issued the ETF or shares. If you are using a CHESS sponsored broker then you will not be allocated a SRN (you will be allocated a HIN). To read more about the different options for holding shares view this link here from the ASX website. It’s important to keep your SRN number and any documentation you are sent relating to this number safe and secure as this will help you manage the administration relating to investing.
- Share Registry Service
Share Registry Services allow you to manage the administration pertaining to your ETF’s (or individual shares). This is where you can:
- Download your income (distribution) statements and tax statements,
- Update your personal details,
- Add your tax file number,
- Update your bank details,
- Opt into a distribution reinvestment plan (if you want more information on how to opt into your DRP then read the following article ‘How do I opt into a Dividend (or Distribution) Reinvestment Plan?’
- and update your communication preferences.
There are different Share Registries out there, and you are allocated one based on what ETF’s you purchase (you don’t get to choose). If you purchase Vanguard ETF’s your Share Registry will be called ComputerShare. If you purchase BetaShares ETF’s your Share Registry will be called Link Market Services. There are many others. After you purchase your ETF you will receive paperwork and this will contain information on how you can access your share registry. I recommend logging into your share registry as soon as you receive your login details and instructions. This will help you avoid issues like having additional tax withheld due to having no TFN registered, or not having your distribution paid because you have no bank details registered.
- Asset Allocation
ETF’s contain at least one asset class (often more), and these asset classes are listed in your ETF’s fact sheet. The asset allocation of an ETF is the % allocated to each asset class/classes. Depending on the ETF these %’s are fixed or variable. If the ETF is a fixed asset allocation then the fund will not allow the asset class to go over the %, and will rebalance the assets as values change over time. If the ETF has a variable asset allocation that quite often there is some wriggle room, and the manager of the fund will allow the % to go over or under depending on the market. The best way to understand this more is to take a look at an ETF that you are looking to invest in, and check out it’s fact sheet. For example use the link here to check out the asset allocation for the ETF VDHG (see page 2).
- Distribution Reinvestment Plan
Distribution Reinvestment Plans or DRP’s are an income distribution option that some ETF’s (and individual shareholdings) provide. If you have selected to be paid your distributions via a DRP then your distribution income will be automatically reinvested in purchasing more ETF units (to the value of the distribution). If you would like to learn more about DRP’s check out my post named ‘What is a dividend (or distribution) reinvestment plan?’
- Income Distribution Frequency
If an ETF pays out income it will pay out any income in the form of distributions (unlike shares which pay out income in the form of dividends). Distributions like dividends are not guaranteed (in most circumstances), however if a distribution is to be given it will be announced at regular intervals. Distributions can be announced and paid monthly, bimonthly, quarterly, six monthly or annually. You can find this information when you are doing your due diligence and research when selecting an ETF to invest in. The Income Distribution Frequency is most often found on your ETF fact sheet which most ETF managers have (you can find these with a simple google search in most cases).
As mentioned at the beginning of this article these 10 top terms to know before investing in ETF’s are just the tip of the iceberg (and don’t forget to head on over to the free online courses available from the ASX). I can’t stress the importance of educating yourself before investing in anything, and if you don’t have the time then there are a tonne of awesome financial planners out there who can do the leg work for you.
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Frank on FIRE 