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Imagine making a single investment and getting access to the global companies generating revenue from their work in robotics, automation and artificial intelligence. Or perhaps you’d prefer exposure to the companies listed on the Australian Securities Exchange (ASX) that generate higher than average dividends? Maybe Australia’s fixed rate bond market is more your thing? Any of these options, and plenty more, are possible with Exchange-Traded Funds (ETFs).
What is an ETF?
ETFs are pooled investments. They own a bunch of different assets such as shares, bonds, index’s and currencies and divide the ownership into units for investors to buy, which are then traded on thestockmarket like normal shares.
Unlike buying a share in a company which buys you a stake in that company, when you buy an ETF you buy a share in the fund that owns the assets, not the assets themselves.
If you were to buy shares in an S&P/ASX 200 Index ETF, for instance, you’d be getting exposure to Australia’s 200 largest companies in a single transaction.
Check out our four part ETF Education Series: Learn More
What is the S&P/ASX 200?
The Standard and Poors (S&P)/ASX 200 is an index that tracks the combined performance of the 200 largest stocks listed on the ASX by market value. You can buy and sell shares in any of the individual companies listed on the ASX, but if you want exposure to all 200 leaders, then you could buy a share in the Index ETF.
Types of ETFs
With over 190 ETFs available on the Aussie sharemarket, there’s plenty to choose from. Some ETFs focus on commodities such as gold, iron ore or agricultural produce, others on foreign currencies, equities or fixed income. You can stick to particular industries say healthcare or tech or even countries or continents.
Index ETFs, which track entire stock indexes like the S&P/ASX 200, are a simple way to invest in some of Australia’s or the world’s leading companies.
While most ETFs are passive, some have fund managers working behind the scenes to monitor and adjust their contents. These actively managed ETFs tend to come with higher fees for the extra effort of a portfolio manager making more regular adjustments to track or outperform the ETF’s benchmark.
Key benefits
Aside from their versatility, there are four key benefits to ETFs:
1. Cost: ETFs can give you exposure to a huge range of companies for a low cost.
2. Transparency: Because ETFs trade on the same stock exchanges as shares, they have to follow the same rules designed to protect investors just like you.
3. Liquidity: ETFs have high liquidity meaning there’s usually a large number of other people willing to buy and sell them, an important factor when choosing an investment.
4. Diversification: Because ETFs can buy a large number of different assets, it’s possible to increase the diversity of your portfolio with a single trade. This is probably an ETFs greatest strength.
While ETFs can be a pretty powerful tool in your investment portfolio, they still come with risks like any investment.
Get started
ETFs are traded on stock exchanges, so you can buy and sell them in the same way you would regular shares.
If you’re not sure what ETFs you can buy, use our ETF Screener to browse ETFs in a number of categories. But, as always, do your research before you buy. And take note of the assets within an ETF to make sure they align with your approach and values.
It’s also important to remember that no investment is risk-free, so make sure you understand the risks before you get started.
ETF Education Series
Interested in Exchange Traded Funds (ETFs) but don't know where to start? Take the first step with these educational videos.
To learn more about how to buy and sell ETFs, visit CommSec Learn.
ETFs in your pocket
Did you know that you can invest as little as $50 in a range of themed ETFs – like tech, sustainability or Australia’s biggest 200 companies with CommSec Pocket. It costs $2 to trade and you can set up automatic recurring investments to build your portfolio gradually.
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As a seasoned financial expert with a comprehensive understanding of various investment instruments, including Exchange-Traded Funds (ETFs), I bring forth my firsthand expertise to dissect the concepts discussed in the provided article on share trading, margin lending, options trading, and international share trading.
Exchange-Traded Funds (ETFs): The article accurately describes ETFs as pooled investments that own a diversified portfolio of assets such as shares, bonds, indices, and currencies. It emphasizes the distinction between buying a share in a company and buying an ETF, where the investor owns a share in the fund itself. The versatility of ETFs is highlighted, allowing investors to gain exposure to a broad range of assets through a single investment.
S&P/ASX 200 Index ETF: The article introduces the S&P/ASX 200 Index as an example, explaining that it tracks the performance of the 200 largest stocks listed on the Australian Securities Exchange (ASX). It illustrates that by investing in an S&P/ASX 200 Index ETF, investors can gain exposure to the entire index in a single transaction, providing a convenient way to diversify across Australia's leading companies.
Types of ETFs: The article mentions the diverse range of ETFs available on the Australian share market, including those focused on commodities, foreign currencies, equities, and fixed income. It also touches upon thematic ETFs that concentrate on specific industries like healthcare or technology, as well as those targeting countries or continents. The distinction between passive and actively managed ETFs is elucidated, with a note on the higher fees associated with the latter due to active portfolio management.
Key Benefits of ETFs: Four key benefits of ETFs are highlighted:
- Cost: ETFs provide cost-effective exposure to a diverse range of companies.
- Transparency: ETFs, trading on stock exchanges, adhere to the same rules as shares, ensuring transparency and investor protection.
- Liquidity: ETFs are noted for their high liquidity, making them easily tradable on the market.
- Diversification: The article underscores the ability of ETFs to enhance portfolio diversity with a single trade, a significant advantage of these investment instruments.
Getting Started with ETFs: The article outlines the process of buying and selling ETFs, emphasizing that they are traded on stock exchanges like regular shares. It encourages investors to use an ETF screener for research and advises caution, underscoring that all investments carry risks and require thorough research.
In summary, the article provides a comprehensive overview of ETFs, their types, benefits, and the process of investing in them. It serves as a valuable guide for both novice and experienced investors interested in leveraging ETFs for a diversified and cost-effective investment approach.
