There’s a reason why ETFs are rising in popularity with over 2.2 million Aussies now holding some form of the open-ended investment fund in their stock portfolio — and the domestic industry swelling to its highest-ever annual funds under management ($246.3 billion).
Between the simplicity, instant diversification, and low costs, it may very well be the perfect avenue to begin your wealth-creation journey in a landscape that can otherwise be informed by volatility. Here’s everything you need to know about ETFs (Exchange-Traded Funds).
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What is an ETF?
An Exchange-Traded Fund (ETF) is a listed fund that can be purchased or sold like any share on the Australia Securities Exchange (ASX). They’re often representative of an index, an underlying asset like a currency/cryptocurrency or commodity, sector, even investing philosophies, e.g. S&P 500, gold, tech companies, and ethical enterprises.
Unlike purchasing a single stock, when you buy into an ETF, you’re essentially buying into a “basket of securities.” ETFs provide exposure to an entire portfolio of assets, making it extremely easy to diversify your holdings.
There are two main types of ETFs: passive and active.
A passive ETF — the most common kind — simply tracks the performance of an index, asset class, or sector and is re-evaluated periodically; whereas an active ETF is — as the name suggests — actively managed by professionals with the aim of outperforming an index.
How to buy an ETF in Australia
Much like the purchase of any share on the stock market, buying an ETF in Australia basically comes down to the following simple steps:
- Pick an online broker or share trading platform.
- Sign up for a brokerage account.
- Verify the share trading account with official ID, e.g. driving licence, passport, birth certificate, etc.
- Transfer funds from your bank account into your brokerage account.
- Search & select the ETF you want to invest in.
There are, of course, plenty of factors you should always. Like the ETF’s portfolio structure, past performance (although this is never a guarantee of future results), management fees, and so forth. But we’ll explore this a little further momentarily.
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ETFs vs Mutual Funds
While the fundamental concept behind Exchange-Traded Funds (ETFs) and mutual funds is virtually identical, there are some key differences. Chief among them is how and when you can trade.
Given ETFs are traded like stocks, you can purchase and sell them any time during market hours. Mutual funds, on the other hand, are only priced once a day — meaning you can only trade them once a day after the market closes based on the fund’s net asset value (NAV).
As a result, it also makes ETFs more liquid and convenient than mutual funds. Coupled with the lower management fees and tax efficiency — investors only pay capital gains taxes once they sell (plus on any dividends received) — it also makes ETFs more cost-effective than mutual funds.
Pros & Cons
Pros
- Diversification
As mentioned earlier, ETFs provide instant exposure to a range of assets while also mitigating risk (investments are distributed across various securities, sectors, regions). - Lower Barrier of Entry
Given most ETFs are index funds that match market performance over time (which is historically stable), it’s perhaps the easiest way to begin investing, and avoid analysis paralysis when compared to single stocks. It also simplifies otherwise complicated processes like investing in individual bonds. - Cost-Effective
ETFs generally have lower management fees or management expense ration (MER) and a more tax-efficient structure that minimises capital gain distribution compared to managed funds, making them an excellent option for long-term investors. - Liquidity
The ability to snap up and offload with the click of a button cannot be overstated. Even if an ETF hasn’t traded much during the day. Because unlike regular stocks, on-screen trading volume isn’t an indication of liquidity. - Transparency
ETFs disclose their holdings regularly, so you always know where your money is going (even if you don’t have that much of a say). - Set & Forget
Pick the right ETF and it can be the most low-maintenance, long-term investment.
Cons
- Overdiversification
The diversity of an ETF’s holdings can dilute returns. Slow and steady may win the race (and offer far less stress), but more often than not, it also means removing any potential for ridiculous short-term gains. - This Isn’t A Democracy
As touched upon above, investors cannot construct an ETF or choose the asset allocation. You buy into the package deal, take what you get, trust the process, and hopefully, reap the rewards. - Tracking Errors
ETF returns may not always accurately reflect the index or asset it tracks.
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The Best Performing ETFs in Australia
According to Canstar, these are the highest-return ETFs in Australia as of November 2024. (NOTE: past performance is not an indicator of future performance)
| Australian Broad Based ETFs | Single Year Return | 3 Year Average Annual Return | 5 Year Average Annual Return |
|---|---|---|---|
| Betashares FTSE RAFI Australia 200 ETF (ASX: QOZ) | 22.06% | 11.69% | 9.01% |
| Vanguard MSCI Australian Large Companies Index ETF (ASX: VLC) | 23.05% | 11.65% | 9.41% |
| iShares Edge MSCI Australia Multifactor ETF (ASX: AUMF) | 25.00% | 9.72% | 7.60% |
| Betashares Australia 200 ETF (ASX: A200) | 23.44% | 9.65% | 8.41% |
| iShares Core S&P/ASX 200 ETF (ASX: IOZ) | 23.25% | 9.46% | 8.19% |
| Australian Sector ETFs | Single Year Return | 3 Year Average Annual Return | 5 Year Average Annual Return |
|---|---|---|---|
| Betashares Australian Bank Senior Floating Rate Bond ETF (ASX: QPON) | 5.95% | 3.94% | 2.83% |
| VanEck Australian Floating Rate ETF (ASX: FLOT) | 5.54% | 3.63% | 2.52% |
| Vanguard Australian Corporate Fixed Interest Index ETF (ASX: VACF) | 6.71% | 1.32% | 1.14% |
| VanEck Australian Corporate Bond Plus ETF (ASX: PLUS.AX) | 8.15% | 0.87% | 0.91% |
| Betashares Australian Investment Grade Corporate Bond ETF (ASX: CRED) | 10.73% | 0.36% | 0.64% |
| Australian Strategy Based ETFs | Single Year Return | 3 Year Average Annual Return | 5 Year Average Annual Return |
|---|---|---|---|
| Betashares Geared Australian Equity Fund (hedge fund) (ASX: GEAR) | 46.68% | 15.04% | 10.43% |
| Vanguard Australian Shares High Yield ETF (ASX: VHY) | 21.58% | 12.97% | 9.99% |
| iShares S&P/ASX 20 ETF (ASX: ILC) | 22.48% | 11.04% | 9.12% |
| SPDR S&P/ASX 50 Fund (ASX: SFY) | 23.06% | 10.57% | 7.99% |
| SPDR S&P/ASX 200 ESG Fund (ASX: ES200) | 22.58% | 10.28% | N/A |
| International Broad Based ETFs | Single Year Return | 3 Year Average Annual Return | 5 Year Average Annual Return |
|---|---|---|---|
| iShares Global 100 ETF (ASX: IOO) | 32.08% | 14.90% | 16.42% |
| SPDR S&P 500 ETF Trust (ASX: SPY) | 36.08% | 14.49% | 16.48% |
| VanEck Morningstar Wide Moat ETF (ASX: MOAT) | 26.98% | 14.38% | 14.54% |
| iShares S&P 500 ETF (ASX: IVV) | 35.92% | 14.34% | 16.30% |
| Betashares Global Income Leaders ETF (ASX: INCM) | 29.32% | 14.00% | 6.25% |
Tips & Tricks
- The Devil’s In The iNAV
The indicative net asset value (iNAV) is yet another major benefit of investing via ETFs. It’s essentially an estimate of a fund’s “fair value” in real-time throughout the trading day. This data allows you to get a better sense of whether it’s worth the investment. - Always Use A Limit Order
To further mitigate risk in a volatile market, you can set a price limit to your buys and and sells of ETFs when trading through an online broker or platform. This allows you to avoid paying out the nose on the way in and losing too much value in your position on the way out, respectively. - Avoid Trading In The First & Last 10 Minutes Of The Day
Generally speaking, there is less information available at these times of day and often more volatility. The market maker’s spreads can be wider, meaning the iNAV may be based on prices that can move significantly within moments. - Play The Long Game
ETFs are predominantly meant for long term holds. Patience is a virtue.
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Any advice found within this article on ETFs is strictly general, and not to be taken as hard financial advice as it does not take into account your individual circumstances, personal objectives, or financial needs. No matter how low-risk it may seem, always consider the risks involved before you get involved, take a look at the terms and conditions of all products involved — e.g. specific fees and charges, foreign exchange conditions, any product disclosure statement, other important information, etc — and please refer to official financial services for tailored advice.
