
Get exclusive money-saving offers and guides
Straight to your inbox
Updated . What changed?
We’re reader-supported and may be paid when you visit links to partner sites. We don’t compare all products in the market, but we’re working on it!
Exchange traded funds (ETFs) are investment funds made up of multiple shares or other assets that can be bought and sold on a stock exchange.
ETFs have become popular in the last few years thanks to the rise of index fund investing and because you can access multiple shares in one trade. But how do they work, are they safe and how do you invest in them? Our guide covers everything you need to know about ETF investing.
To buy an ETF, you’ll need to sign up for an online trading account:
Standard brokerage - Australian ETFs
Pay zero commissions when you invest in Australian ETFs and trade ASX stocks with a $5 flat fee.
Important: Share trading carries risk of capital loss.
ETFs are bought and sold just like regular stocks, so you'll need to choose an online broker before you are able to invest.
Important: Share trading can be financially risky and the value of your investment can go down as well as up. “Standard brokerage” fee is the cost to trade $1,000 or less of ASX-listed shares and ETFs without any qualifications or special eligibility. If ASX shares aren’t available, the fee shown is for US shares. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
An ETF is a low-cost investment fund that can be traded on a stock exchange such as the Australian Securities Exchange (ASX). These funds are created by ETF issuers and fund managers and are comprised of a basket of securities such as shares and bonds.
Each ETF is allocated an ASX code and can be bought and sold by investors the same way that you would buy and sell shares. By investing in ETFs, you can easily create a diversified portfolio and spread your investment across a wide range of asset classes, including Australian shares, global shares, fixed income, debt, foreign currencies, commodities and metals.
Having trouble choosing an ETF? Read our guide to Australia's best performing ETFs.
An exchange trade fund is a basket of securities that has been listed on the Australian Securities Exchange by ETF issuers and fund managers. While standard ETFs typically track an index, others are actively managed or use derivative products to influence the fund’s performance. Put simply, an ETF is a fund of securities that can be traded on a stock exchange.
ETFs have built a reputation for being low-risk and for delivering decent returns over a long period of time. That’s mostly true for index fund ETFs, but listed funds today come in many shapes and sizes, and some of them carry as much risk as any stock on the ASX.
To make matters more confusing, the terms are frequently muddled between fund managers and investors. As a way to avoid confusion, ASIC and the ASX has broadly labelled them all "exchange traded products" (ETPs) and subcategorised them into "ETFs" (index funds), exchange traded managed funds (ETMFs) and synthetic funds or structured funds.
Despite their efforts, you'll find they're mostly just referred to as "ETFs" by investors and analysts.
On the outside, these can appear to be very similar. However, they're quite different in nature in terms of strategy and level of risk.
ETFs access investment assets in two ways: physically or synthetically. ETF issuers of a physical (or standard) ETF have purchased the underlying asset on the index it aims to replicate. When you invest in an ETF, it doesn’t mean you own the assets yourself; instead, you own shares in the ETF that holds the assets.
On the other hand, structured or synthetic ETFs try to replicate the performance of its underlying assets through the use of derivatives. This is because it’s not always practical to hold physical assets. For example, gold or commodity ETFs are often synthetic. This means that when you invest in one, you’re not actually buying a lump of gold; rather, you’re investing in a contract that promises returns based on the commodity’s price movements.
Warning: Because structured products may use complex investment strategies, they can be much riskier than a standard index ETF.
You can read more about synthetic ETFs here.
Active ETFs or ETMFs are actively managed listed funds. Fund managers aim to outperform the market by manoeuvring securities and sometimes derivative products within the fund. As such, they may carry higher risk than passive index funds and usually charge higher fees for the service.
Commodity ETFs, or exchange traded commodities (ETCs), track the performance of an underlying physical commodity, such as gold, natural resources and agricultural products. Instead of investing in the actual commodity, the ETF will typically track the price movements of the commodity or its index. Because of this, commodity ETFs are typically synthetic or structured products.
There are many reasons to consider investing in ETFs:
Some ETFs pay dividends if the underlying company stocks pay dividends. However it also depends on whether the fund manager chooses to pass this on, so check this first if this is a priority.
Most of the time ETFs will pay their dividends on a quarterly basis, though this isn't a rule. If you're interested in ETF dividends, check the yield, how often it's paid, and whether you can reinvest the payments back into the ETF if you choose or if it's paid into your account. Yield is the percentage of the amount you've invested which is paid to you as dividend income.
Like share prices, the price of ETF units can fluctuate day-to-day. However, many ETFs move up and down in line with the index they are tracking, so there are a few simple tips to keep in mind to help you get more out of your ETF investments:
When you invest in an ETF, the first cost you'll be aware of is the ETF unit price; however, there are other less obvious costs you need to be aware of, such as the management fees. While ETFs typically charge lower fees than unlisted managed funds, this isn't always the case.
You should always read the PDS provided by the ETF issuer for full details of any fees that apply and how they will affect your investments. Here are the main costs to take note of:
ETFs are often advertised as being a safer investment than directly buying shares on the stock market, but this is not always the case. Although many ETFs are relatively safe index funds that track major indices, it's also possible for an index fund to track a volatile global market, such as rare earth metals or the oil market.
You should also remember that technically any kind of asset can be bundled into a fund as well as risky derivative-type products. This means that not all ETFs are passive index funds as you may believe. Always do your research before you invest. Here are some of the main risks to consider:
Synthetic ETFs have all the same risks as physical ETFs, but they also expose you to a few additional potential problems:
Before deciding whether ETFs are the best investment solution for you, make sure you’re fully aware of how they work and have an in-depth understanding of all the risks involved. Read the PDS closely, ask questions of the ETF issuer if you’re unsure about anything and consider seeking help from a qualified financial adviser.
It's also possible to trade CFDs with ETFs as the underlying asset. CFDs are contracts for difference, which allow traders to speculate on the value of financial products without owning the underlying asset. For example, traders can purchase a CFD with an ETF as the underlying asset, and speculate if you think the ETF will rise (go long) or fall (go short) in value. CFDs are leveraged products, meaning that the potential returns on your investment are magnified; however, so are your potential losses, and you can lose more than your initial deposit.
From costs and finance options to what materials you’ll need, learn about bathroom renovations in this comprehensive guide.
Here is the essential info you need to know about investing in the stock market for your children.
Can't decide between AustralianSuper or Hostplus? We've compared their fees, performance and investment options side-by-side to help you choose.
Everything you need to know about this highly anticipated Chinese IPO.
The online retailer is expected to raise $40 million as it launches onto the ASX. Here's what you need to know.
Everything you need to know about Australia's biggest IPO of 2020.
Invest in a diversified portfolio of Australian and global stocks designed by leading fund managers.
Trade ASX shares and ETFs with commissions starting at $8.
Trade ASX stocks and ETFs with a flat $5 brokerage fee and a low minimum investment of just $100.
SPONSORED: You often hear people talk about whether the ASX200 is up, down or flat. So, why is it such a big deal?