Exchange Traded Funds – Australian ETF 101

Everyone is to be talking about it. There has been an explosion of Exchange Traded Funds (ETFs) in Australia. It is about to surpass $18 billion in value in Australia. There are now more than 100 ETFs available on the ASX.

The investment industry keeps throwing around names like Vanguard and iShares. So what is an ETF? What are the Australian ETFs? Who are the people and players involved? And why it matters to you.

We have picked out the best content about ETFs to answer these questions. To the extent relevant, we have tried to keep the content Australian centric.

Index Funds

The growth of ETFs started with the rise of Index Funds in Australia. In this article, we cover the key benefits of Index Funds (and how to invest in them):
  1. they are cheap;
  2. they provide diversification.

 

It is Vanguard Group from the US that made the concept of Index Funds famous. The head of Vanguard Australia highlighted that even Warren Buffet has asked the trustees to his wife's inheritance to invest the money in Index Funds.

 

The AFR provides an analysis of the pro's vs con's of Index Funds investing:

PRO's
  • Mirror performance of a market
  • Longevity of managers
  • Lots of choice
  • Diversification of investments

 

CON's

  • Running risk of the market you pick
  • It is lazy investing
  • There can be errors in tracking the market

 

Index Funds represent "Passive" investing. Meaning that once you are invested, you set it aside, leave it for the long term. The alternative is "Active" investing, symbolised by Fund Managers picking stocks and trying to time the market, continuously buying and selling stocks based on these factors.

Time and time again, it has been shown that Index Funds perform better than the majority of Fund Managers. In a study in 2014, it showed that Index Funds beat 75% of active Fund Managers.

 

 

What are ETFs?

ETFs kind of like Index Funds that are listed on the stock market (i.e. the ASX). They are a portfolio of securities or shares that have been created to track a specific index. They can be bought and sold just like shares on the ASX.

ETFs work by owning a collection of shares that make up a market index - for example the ASX 200 Index. It then divides ownership of those investments into a share in the ETF.

A few explanation of ETFs can be found:

 

When deciding whether to go for an ETF or an Index Fund, three key considerations are:

  • do you have a share trading / broker account?
  • will you put down more cash as time goes on?
  • how much do you value liquidity and being able to trade?

 

 

Index Tracked by ETFs

Australian ETFs can be divided into 8 broad categories:

  • Australian Broad Base: tracking the entire ASX - i.e. the largest 200 companies in Australia
  • Australian Sector: tracking a specific sector in Australia like mining
  • International Broad Base: tracking entire markets of international exchanges or regions - i.e. S&P 500 from the US
  • International Sector: tracking a specific sector in international markets - i.e. S&P Global Healthcare
  • Australian Strategy: tracking Australian Broad Base but with added smarts offered by the ETF operator - i.e. the high yield stocks in the largest 200 companies in Australia
  •  Currency: tracking $A vs other currencies like US$ or Euro
  • Fixed Income & Cash: tracking Australian government or corporate bonds - i.e. Aust Treasury Bonds
  • Commodity: tracking the price of specific commodities like Gold price

 

ETFs within each category tries to differentiate itself from others by tracking slightly different indices. The most common indices are those created by

 

Even though many ETFs tracks the same market, not all ETFs are made equal. Some perform better than others. Morningstar has put together a very useful table in analysing ETFs that cover the Year to Date (YTD), 6 months, 1 year, and 3 year return of each ETF.

 

 

ETF players in Australia

The Australian ETF market is dominated by global leaders. There are a number of Australian players offering more niche products. The key players are:

 

That covers the basics of ETFs. I'd love to hear from you if you have other useful resources I should add to this.

About the Author

jeremykl

Cofounder & CEO of BetterWealth (@jeremykwonglaw). Former investment banker turned technology entrepreneur. muru-D alumni (Telstra startup accelerator). Passionated about leveraging technology to provide better financial products & services to consumers. Coffee snob, business book reader, and fitness fan.

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