What is an Exchange Traded Fund (ETF)?
Exchange Traded Funds (ETFs) are an efficient and low-cost way of investing in shares or other assets and have become one of the world's most popular ways to invest.
ETFs are managed funds that trade on an exchange like the ASX. You can trade ETFs in the same way you trade shares. The difference is that an ETF represents an investment in a basket of shares or bonds while a share represents an investment in just one company. An ETF’s basket could include a handful of shares or bonds or include hundreds. The shares or bonds contained in an ETF are usually determined by shared characteristics and a set of rules. For example, an ETF might include all the banks listed on ASX or it could include the top 25 global healthcare companies.
ETFs have made available investment opportunities that were previously inaccessible for everyday investors. With ETFs, you can now easily access companies listed overseas like the tech giants Apple, Microsoft and Google (which are listed in the US).
Some ETFs also give you low-cost access to investment strategies that are usually associated with onerous research or company analysis, for example, the consideration required to assess a company’s ethical or sustainability credentials.
How are ETFs used for investing in Australia?
There are now more than 300 ETFs in Australia, available via the ASX. Australian investors are increasingly using ETFs to invest in Australian companies, international companies, bonds and other securities. Over 1.5 million Australians invest in ETFs1.
Australian investors are using ETF investment strategies to build their portfolios and gain access to the multitude of markets, sectors and asset classes around the world via the ASX. Around 50% of ETFs on ASX2 provide exposure to overseas markets.
Want to invest in ETFs but not sure where to start?
Our ETF starter kit is here to help.
Download nowBenefits and disadvantages of ETFs
Advantages of ETFs
Easy access
Provide investors access to international markets, asset classes and investment strategies that were previously only available to institutional investors.
Transparency
With ETFs, you know what shares or other assets are in the fund, along with how they are selected for inclusion because ETF fund managers are required to publish holdings daily. In addition, because ETFs are listed on exchange they price throughout the trading day, and when you want to transact, you have full price transparency.
Helps to reduce risk
As your investment in an ETF is spread across a number of shares or other assets, it is considered less risky as you are not reliant on the growth of a single company or asset.
You don't need a lot of money to start investing in ETFs
Many online brokers require a minimum of $500 but some are even lower. ETFs are a way to invest small amounts of money into many individual shares or bonds.
Lower costs
The management fees for ETFs are typically less than actively managed funds and less than the fees associated with investing in each of the companies directly.
Saves time
Most people do not have the time and/or expertise to be able to constantly research and track companies to identify suitable investment opportunities or know when to buy and sell that stock. An ETF eliminates much of that effort while still giving you access to a professionally managed portfolio.
Tax benefits
ETFs typically have lower turnover than active managers and therefore generate lower levels of capital gains tax liability. As with most things to do with tax, the benefits can be complex to explain, so we recommend reading our specific information sheet called Tax Advantages of ETFs for a more thorough explanation of the tax benefits of ETFs. You can find it here: vaneck.com.au/
Flexibility
As ETFs trade on ASX, you can buy and sell ETFs at any time during the trading day, just like shares in individual companies.
Potential disadvantages of ETFs
Performance not guaranteed
Like any investment, ETFs will not always increase in value. The performance of each ETF is determined by the performance of the companies, bonds or other securities held by the ETF.
Loss of control
Investors can’t pick which companies are in an ETF. ETFs track an index, and this index determines the companies, bonds or other securities included in the ETF. Investors do not have the option of adding or removing companies, bonds or securities.
Types of ETFs
There are many different types of ETF investments available on ASX.
Australian ETFs
With ETFs, you can access Australian equities, including large companies like CBA, Australian mid-caps and small-caps, as well as Australian bonds.
Explore Australian equities ETFs
Explore Australian bond ETFs
International ETFs
Invest in overseas companies or bonds, and access international markets and sectors via ETFs. Investors can access tech giants like Microsoft and Alphabet, multinational pharmaceuticals like Pfizer, and clean energy leaders like Denmark's Orsted, all via the ASX.
Explore international equities ETFs
Explore international bond ETFs
Sector ETFs
With an ETF, you can focus your investment on a particular sector in Australia, like the big banks or access global sectors, like healthcare, resources, infrastructure, property and more.
Explore sector ETFs
Dividend-focused ETFs
Dividend ETFs focus on providing investors with regular dividend payments. These ETFs are popular with income-focused investors.
Discover a dividend ETF on ASX.
ESG ETFs
ESG ETFs, also known as sustainability ETFs, focus on companies that rate highly on environmental, social and governance (ESG) factors.
Discover ESG ETFs
Smart Beta ETFs
Smart beta is the term given to ETFs (Exchange Traded Funds) which track an index that differs from the traditional market capitalisation approach of selecting shares, bonds or other assets. That is, smart beta ETFs take a “smarter” and more considered approach to what goes into the fund other than just the size of the company.
Discover this Australian equities smart beta ETF and this international equities smart beta ETF.
Factor based ETFs
Factor investing involves targeting companies or other securities that exhibit a specific characteristic. To be considered a “factor”, the characteristic must be important to explaining the risk and return of the company or security. Example of factors include value, quality, momentum and size.
Discover quality investing and quality ETFs.
Discover value investing and value ETFs.
Commodity ETFs
Commodity ETFs give you access to one or more type of commodity. This could include agricultural products like wheat and livestock, energy like oil and gas, and metals like gold and lithium.
Discover this gold bullion ETF and Australian resources ETF.
Bond ETFs
Also known as fixed income ETFs, bond ETFs provide a portfolio of bonds. These could include a specific type of bond like Australian Government bonds, floating rate bonds, corporate bonds, US Treasury Bonds or other types of bonds.
Property and infrastructure ETFs
These ETFs provide access to a portfolio that focuses on listed property assets or listed infrastructure companies.
Discover a global infrastructure ETF.
Discover an Australian property ETF and an international property ETF.
ETFs vs managed funds vs index funds
Defining ETFs, managed funds and index funds
A managed fund
A managed funds is a type of investment where your money is pooled together with other investors3. A fund manager is then responsible for buying and selling assets to increase the value of the pooled money. There are many different types of managed funds. In the US, these are known as mutual funds.
Managed funds can be broadly categorised by:
- The way investors can access the fund. Managed funds are either:
- Listed on a stock exchange; or
- Unlisted, meaning investors have to fill out forms to apply to buy into and sell out of the fund.
- How assets are selected. Managed funds either:
- Rely on a person or team to decide where to allocate money and what assets to invest in. This is known as active management because the fund manager or team of managers is actively choosing the assets to invest; or
- Follow an index which outlines the set of rules or criteria for what the fund invests in. This is known as passive management.
So, index funds are simply a fund that tracks an index. Index funds can be listed or unlisted. ETFs are listed index funds.
ETFs are a type of managed fund that track an index and are easily accessible because they are listed on an exchange just like shares. ETFs have the added benefits of being transparent because holdings are published daily, are generally more liquid and have lower costs than actively managed funds.
| ETFs | Listed shares | Listed Managed Funds including Active ETFs | Unlisted Managed Funds | LICs | |
|---|---|---|---|---|---|
| Diversification | High, generally1 | Single stock exposure | High, generally1 | High, generally | High, generally |
| Pricing | On exchange2 | On exchange | On exchange | Next business day | On exchange |
| Liquidity | High | Depends on security | High | High, generally3 | Depends on security |
| Holdings disclosed | Daily | - | Quarterly with three months delay | Top 10, monthly | Monthly |
| Management costs4 | Generally lower than unlisted managed funds | - | High as these are actively managed funds | Higher for actively managed funds | Higher for actively managed LICs |
- The extent of diversification varies depending on the index the ETF tracks.
- ASX requires that an Australian equity ETF has an iNAV service and is supported by a Market Maker.
- An ETF is required to have a Market Maker to facilitate liquidity. Unlisted managed funds process redemptions only on end of day’s or previous day’s price.
- Assuming the ETF and unlisted managed fund have similar investment objectives.
Comparing ETFs and unlisted managed funds
ETFs offer many advantages over unlisted funds. This includes ease of access, ability to see holdings and typically lower costs.
ETFs offer many more advantages over actively managed funds. This includes removing emotional biases and subjectivity that occurs when humans make investment decisions, as well as “key man risk” referring to the tendency for actively managed funds to rely on a single person to make investment decisions. If that person leaves the fund manager, the associated intellectual capital and talent also departs the fund.
In addition, according to the S&P Dow Jones semi-annual SPIVA Australia Scorecard, the vast majority of actively managed funds underperform their benchmarks over the short term (1 and 3 years) and long term (5, 10 and 15 years). This means investors in these funds are typically paying higher fees than ETFs and their fund is likely to be underperforming.
How to invest in an ETF
Investors can buy and sell ETFs on ASX just like shares. In the same manner you buy shares in a company, you acquire 'units' in an ETF. The unit price of an ETF will vary throughout the ASX trading day, just like shares, reflective of the changes in value of the underlying shares or bonds held in the ETF.
Investors can invest in ETFs via a financial adviser or broker, who can purchase them on your behalf, or you can invest directly via an online broker. All the big four banks have online trading platforms and there is also a suite of app-based trading platforms, some of which offer free brokerage if you invest in ETFs.
Best practice ETF trading
You can buy and sell ETFs on ASX in the same manner you trade shares. Below are tips and best practices to help you trade ETFs.
Best times to trade
Australian equities
- Avoid market open: Avoid the first 15 minutes of the trading day when ETFs are less liquid and spreads are wider. ASX opens in stages starting with companies beginning with the letter A and finishes 10 minutes later at Z. During this time the Market Marker will be quoting prices with wide spreads as they cannot accurately value the full portfolio until everything opens.
- Avoid market close: Similar to open, it is difficult for the Market Maker to value the whole portfolio at market close so avoid trading in the last 15 minutes of the trading day.
International equities
- Be aware of International trading times: ETFs with significant exposure to Asia Pacific markets tend to trade better (i.e. at tighter spreads) when the foreign market is open at the same time as ASX. This is not possible in the case of U.S. and European stocks, whose markets are never open at the same time as ASX.
- China trading times: The best times to trade ETFs comprising China A-shares is also when the Australian trading day overlaps with the Shanghai and Shenzhen opening times. These are:
- From 11:30am to 1:30pm or 3:00pm to 4:00pm Monday to Friday (AEST)
- From 12:30pm to 2:30pm Monday to Friday during daylight saving times
- Market closures: It is important to take note of when markets are closed. For example, international holidays could impact the Market Maker’s ability to value ETFs which hold assets from locations where there is a public holiday
Use limit orders
- This type of transaction allows you to set the bid or ask price at which you are willing to buy or sell. You will not pay any more, or sell for any less, than your limit price.
- Trade execution through limit orders provides you certainty and protection for your trade price. However if you set your limit below the ‘ask’ (when buying) or above the ‘bid’ (when selling), there is a risk your transaction will not occur.
- The involvement of a Market Marker usually ensures limit orders at the fair value will be executed.
- Avoid market orders. A market order guarantees you buy or sell your units but does not guarantee the best price and exposes you to paying more, or selling for less, than the fair value of the ETF units. With a market order you lose price control; experienced portfolio managers generally trade with limit orders.
Refer to the iNAV for Australian equities ETF
The iNAV is the ‘indicative Net Asset Value’ of an Australian equities ETF published by ASX. The iNAV changes based on changes in prices of the shares held in any Australian equity ETF portfolio. The iNAV allows investors to track the estimated fair value of an ETF unit throughout the trading day to help decide when to buy and sell. You cannot buy ETF units at the iNAV as the Market Maker will always place a spread to make money for their services. You can buy/sell at the iNAV plus/minus a spread. The iNAV lets you monitor the size of the spread, which can change throughout the day depending on market conditions.
Making large trades
If you are planning on making a large trade, contact our Capital Markets desk to ensure sufficient trading volume is made available.
Contact VanEck’s Capital Markets on 02 8038 3317.
Can investors outperform the S&P/ASX 200?
The S&P/ASX 200 represents Australia’s top 200 listed companies, ranked by ‘market capitalisation’ or ‘market cap’. Market cap defines the size of a company by the total value of its shares, for example CBA’s market cap is over $150 billion.
ETFs have become one of the most popular way to invest in Australian equities, giving investors easy-access to a portfolio of shares in Australian companies.
However, weighting a fund according to market capitalisation can have a negative impact on performance. This is because when the market overvalues a stock its market capitalisation goes up. A fund tracking a traditional market capitalisation index buys more and more of the overpriced stock and loses money when the market corrects. Conversely, when the market undervalues a stock, the fund sells more and more of the underpriced stock, missing profit when the market corrects.
An investor seeking to maximise returns want to allocate more to those companies with the greatest growth potential. By allocating to a market capitalisation index, the assumption investors are making is that those companies with the greatest growth potential are the largest, because they get more of an investment. This issue is more problematic in concentrated markets. The S&P/ASX 200 exposes investors to excessive concentration risk. The top 10 companies represent over 50% of the index. Four of the top six companies are banks. Financials make up over nearly a third of the index. Investors buying a fund that ostensibly contains 200 stocks would likely assume such a broad-based fund to be better diversified.
Conversely, investors can opt to take an equal weighting approach to Australian equities, which has shown to deliver three times more diversification compared to the S&P/ASX 2004. Diversification is an important risk management tool.
Academic research has shown that an equal weighting approach outperforms a market cap approach over the long term. View this research on page 13 of our research paper which describes the mathematical reason why equal weighting has outperformed.
Read more about finding the optimal approach to Australian equities or discover our Q4 Outlook for Australian Equities in our latest VanEck ViewPoint.
Key Risks
An investment in any of our funds involves risks. These risks vary and can be found in the respective product disclosure statement (PDS). We recommend that you speak with a financial adviser, read the PDS and target market determination (TMD) to determine if a fund is right for you.
- ASX
- Ibid
- MoneySmart
- VanEck Research