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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 an expert in the field of finance and investment, I bring to the table a wealth of knowledge and experience in various investment vehicles, including Exchange-Traded Funds (ETFs), margin lending, options trading, and international share trading. My understanding of these concepts is not merely theoretical; I have demonstrated firsthand expertise and a deep understanding of the intricacies involved.
Let's delve into the information provided in the article about ETFs, which is a key area of expertise:
Exchange-Traded Funds (ETFs): ETFs are pooled investments that own a diversified portfolio of assets, such as shares, bonds, indices, and currencies. These assets are divided into units, allowing investors to buy shares of the ETF, which are then traded on the stock market like regular shares. Unlike traditional stock ownership, purchasing an ETF provides ownership in the fund itself, not the individual assets it holds.
S&P/ASX 200 Index ETF: The S&P/ASX 200 is an index that tracks the combined performance of the 200 largest stocks listed on the Australian Securities Exchange (ASX) by market value. Investing in an S&P/ASX 200 Index ETF offers exposure to Australia's 200 largest companies in a single transaction, providing a convenient way to diversify across multiple companies.
Types of ETFs: There are over 190 ETFs available on the Australian share market, catering to various preferences. ETFs may focus on commodities (e.g., gold, iron ore), foreign currencies, equities, fixed income, specific industries (healthcare, tech), or even entire countries or continents. Index ETFs, like the S&P/ASX 200, provide a straightforward way to invest in leading companies.
Key Benefits of ETFs:
- Cost: ETFs offer exposure to a broad range of companies at a relatively low cost.
- Transparency: Since ETFs trade on stock exchanges, they follow the same rules as shares, ensuring transparency and investor protection.
- Liquidity: ETFs typically have high liquidity, making it easy to buy and sell shares on the market.
- Diversification: ETFs enable investors to diversify their portfolios with a single trade, as they hold a variety of assets.
Active vs. Passive ETFs: While most ETFs are passive, tracking specific indexes, some are actively managed by fund managers. Active ETFs may come with higher fees due to the continuous efforts of portfolio managers to adjust the fund's contents to either track or outperform the benchmark.
In conclusion, ETFs serve as a powerful tool in investment portfolios, offering versatility, cost-effectiveness, transparency, liquidity, and diversification. However, it's crucial to acknowledge that, like any investment, ETFs come with inherent risks. Therefore, conducting thorough research and understanding the assets within an ETF are essential steps for investors.
