You might have heard that exchange traded funds (ETFs) are great way to invest your money. It's true that ETFs have become wildly popular in Australia for a few very good reasons.
One of the best features of an ETF is you can use them to invest in a whole portfolio of stocks, including index funds. Some ETFs even let you invest in alternative assets like bonds, property gold and oil.
Plus, they're low-cost and easy to access. In fact, these days you can start by investing in them from as little as a few dollars.
And the good news is that it's a relatively uncomplicated process. This guide cuts through the noise and gets down to the nuts and bolts of ETF investing.
ETFs are traded on the stock market the same way that stocks are, so to access them you'll need to sign up to a share trading platform or investment app.
The first step is to make sure you choose the right platform for your ETF strategy.
For instance, many ETF investors prefer to invest once or twice a year or less into their ETF. So it makes sense to find a platform that doesn't charge any monthly or ongoing fees.
Other investors might want to invest small amounts regularly. In this case, you may prefer to sign up with a platform that charges a low trade (brokerage) fee. Some ETF brokers will charge $0 brokerage fees and instead charge a monthly fee.
Other options include micro-investment or robo-advice platforms such as Raiz Invest or Stockspot. These typically allow you to invest in a portfolio of multiple ETFs based on your risk profile, and you can typically set up an automated investment option with an amount and frequency of your choosing.
Ultimately, the lower the fees the better, but it is important to match your platform with your needs.
Also read: Australia's best ETF trading platforms
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Once you've chosen a trading account, you'll need to sign up.
When it comes to signing up with a broker, it is usually free, but some accounts charge inactivity fees.
The registration process takes place online, and if you're a new customer, you'll need to provide your basic information, including the following:
When it comes to any form of investing, it is important to match your goals, risk profile and objectives.
After all, there's no point in taking on more risk than required to achieve your personal goals.
When it comes to an ETF, this is especially true. ETFs are broken up into 2 categories: passive and active. Your financial goals could help determine which one you choose to invest in and what percentage of your portfolio you invest in either one.
If you choose to invest in a passive ETF, the managers will seek to replicate the performance of a broader equity market, sector or trend. Think of the ASX 200 or S&P 500. If you take a passive approach, you'll likely just track this market.
On the other hand, some managers will choose to actively invest. The aim here is to increase returns, but it will generally cost you more in management fees and can come with more risks.
Now that you've researched the ETFs you want to own, you need to buy them.
This will require you to search for the specific ticker code of the ETF you want to purchase and then you will need to order it.
When it comes to ordering shares, there are a few options depending on what your broker provides. But generally speaking, you can choose either a limit order or a market order. If you choose a market order, you are looking to purchase as quickly as possible, while a limit order is a predetermined price that you choose.
Now that you own the ETF, you should track its performance.
After all, it is important that it continues to align with your personal needs and objectives. If it's continuing as you hoped in step 3, you could keep investing in it. If it's underperforming, it might be time to sell.
But it is also important to give the ETF some time for your thesis to play out. Markets can be volatile in the short period, and they might not reflect the long-term potential of the assets you own.
An exchange traded fund is a bundle of shares or options that is listed on a stock exchange that you can purchase through a single trade.
In layman's terms, it is a pooled investment security that typically tracks a market index, a theme, a commodity or other assets. The original ETFs were passive index funds, but over the last decade, the sector has exploded.
An example of an index fund would be the iShares Core S&P/ASX 200 ETF, a market-tracking ETF made up of the 200 biggest companies in Australia. Investors in this ETF own a small percentage of each company based on market weighting. So, larger companies like BHP and Commonwealth Bank make up a larger holding than say a smaller company like Corporate Travel Management.
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.
The good thing about ETFs is they instantly create a diversified portfolio. By default, you own an entire section of a market, but you can easily add other assets including Australian shares, global shares, fixed income, debt, foreign currencies, commodities and metals.
The main difference between an ETF and a mutual fund is an ETF is listed on an exchange such as the Australian Securities Exchange (ASX).
The humble ETF has evolved from its start as a simple passive investing index. Nowadays, you can get an ETF for pretty much anything ranging from your more traditional passive approach to an active strategy, a thematic strategy and everything in between.
Here are the different ETF types you might want to trade:
Also known as indexed ETFs or index funds, these funds aim to replicate the returns of a specific index or benchmark. For example, you may want to invest in a fund that tracks the performance of the S&P/ASX 200 (Australian stock market) or the S&P 500 (US stock market).
Also referred to as exchange traded managed funds (ETMFs), active ETFs aim to outperform the market or a particular index. These sometimes come with a higher level of risk and usually have higher management fees.
These combine both active and passive strategies. They typically track an index but factor in additional variables, such as a higher weighting of smaller companies. Smart beta ETFs track non-traditional indices designed to invest in a selection of company stocks based on their own set of rules. The idea is to outperform the market.
Synthetic ETFs are where things start getting a little bit more complex.
ETFs access investment assets in 2 ways: physically or synthetically. ETF issuers of a physical (or standard) ETF have purchased the underlying assets on the index it aims to replicate.
Structured or synthetic ETFs try to replicate the performance of their 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 due to the fact that storing large amounts of gold is often difficult. Instead of investing in an actual lump of gold, 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.
Commodity ETFs, or exchange traded commodities (ETCs), track the performance of an underlying physical commodity, such as gold, natural resources or agricultural products.
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. 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:
Generally speaking, ETFs can be an easy way for beginner investors to start investing. When it comes to ETF trading, they have a few beginner-friendly characteristics, including the following:
All in all, ETFs can be a simple way to build towards a long-term financial plan. If you're looking for the best ETFs to invest in, click here.
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: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Ask an expert: What are the main benefits of buying an ETF?
ETFs are a great option for those just getting started with investing as they give investors greater visibility to a number of companies and sectors. The stock market can be very intimidating for those just getting started, but ETFs offer diversification that can otherwise often take a long time to build if investing in individual stocks.
There is also generally a cost saving that comes with investing in ETFs as you're able to save on brokerage by buying units of a singular stock as opposed to paying for multiple trades for stock in every company you're interested in. You can also build a diversified portfolio of stocks more quickly – without needing a large amount of money upfront. Investing in ETFs also helps you reduce your risk, as you don't have all your eggs in one basket – or all your money in one company.
John Winters
Superhero, co-founder
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. This information should be available in the ETF's product disclosure statement.
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.
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:
To see our guide on the best performing ETFs, click here.
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which is the best ETF for gold
Hi Kathy, we can’t recommend any products however the following ASX-listed ETFs are gold-themed: The VanEck Gold Miners ETF, Betashares Global Gold Miners ETF, Global X Physical Gold, VanEck Gold Bullion ETF, Perth Mint Gold ETF, Betashares Gold Bullion ETF. Which you pick depends on your personal goals and circumstances. Remember that some gold-themed ETFs track gold mining companies and other track the price of gold bullion in either AUD or USD.
are there any Australian Vanguard etfs that pay monthly?
Hi Alexander, I’m not aware of any Vanguard ETFs that pay monthly. Distributions are typically paid once a quarter or once a year. However it’s worth reaching out to Vanguard directly to double check this.