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Probably, my 3 favourite ASX-listed exchange traded funds (ETF)

These 3 ASX-listed ETFs are probably my favourite: MAGELLGEF TMF UNITS (ASX: MGE), Vanguard MSCI Index International Shares (Hedged) ETF (ASX: VGAD) and ISHEUROPE CDI 1:1 (ASX: IEU).

Huh?

What?

If you are confused by those names, don’t worry, I am too. They are Google’s names for three of Australia’s leading ETFs.

What is an ETF?

ETF stands for Exchange Traded Fund. They are managed funds which trade on the stock exchange. Investors buy and sell ETFs like normal shares. However, ETFs are not businesses, they are pools of money managed by a company.

Often, computers stand behind the ETF and direct an investor’s money into a pool with other investors which is then, for example, used to buy all of the shares included in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). So, with just one investment the investor gets exposure to 200 companies. ETFs pays distributions which are the sum of all dividends paid by the companies and if the ETF’s price goes up — you benefit. Just like a normal share.

However, some ETFs are NOT run by computers tracking a market index like the ASX 200. Sometimes, the ETF will be used as a pool of investors’ money and invested by a professional investment team.

For example, Magellan Financial Group Ltd (ASX: MFG) launched their successful Global Fund in an ETF wrapper back in March 2015. The Magellan Global Equities ETF (MAGELLGEF) is managed by a professional investment team based in Sydney. The team buy a portfolio of shares on international markets which they think will outperform the market. The fund also benefits from a stronger US Dollar ($) (USDUSD).

Another ETF more than worthy of a mention is the Vanguard MSCI Index International Shares (Hedged) ETF.

Vanguard, is the fund manager.

MSCI Index International Shares, is the market index that the fund tracks. It includes around 1,584 individual companies from around the world.

Hedged, means the fund neutralises the currency effect, so you benefit — or lose — from the movements in the shares, not the currency.

Vanguard is a fantastic ETF provider because its products are very cheap. This ETF costs investors just 0.21% per year, which is deducted directly from the portfolio.

Finally, ISHEUROPE is Google-speak for the iShares Europe ETF. Basically, it tracks the top European companies (around 368 today) in US dollars. Therefore, investors can benefit from favourable US dollar movements, increases in the companies’ share prices and distributions (aka dividends). The ETF has an estimated distribution of 2.7%.

Why don’t you include Australian ETFs?

Most passive (market tracking) ETFs in Australia are poorly conceived ideas, in my opinion. And given how concentrated the local sharemarket is, you may as well just go and buy Commonwealth Bank of Australia (ASX: CBA) and BHP Billiton Limited (ASX: BHP) shares yourself. For the record, neither company’s shares are a buy in my book. 

Don’t get me wrong, there are many ETFs I would buy. But I’d buy these three international ETFs first. For example, I bought my young sister the Vanguard ETF a couple of months ago.

Other good ideas

For the record, ETFs are not the only way to skin a cat (so to speak). I buy shares directly on the ASX through my broker and internationally, through my optionsXpress account.

But the ASX also has an mFund service.

By design, mFunds are nearly the same thing as active ETFs like Magellan. You can buy into these funds just like an ETF — through your online broker. One of my favourite mFund’s is the concentrated Global Fund run by Peters MacGregor (PMW01), also based in Sydney.

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Motley Fool Contributor Owen Raszkiewicz owns units of the Vanguard MSCI International Shares (Hedged) ETF and Alphabet Inc (the owner of Google). Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Alphabet (A shares) and Alphabet (C shares). The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.