How to Buy ETFs in Australia: A Beginner Guide
Selfwealth
This article covers:
What is an ETF?
Why Invest in ETFs?
Why are ETFs so Popular?
How does an ETF Work?
What Drives the Price of an ETF on the ASX?
What are the Fees for an ETF?
How to Access International Markets with ETFs
What are the Best ETFs in Australia?
ETFs are an extremely popular financial product in Australia, growing significantly year-on-year. We've written a guide to ETFs, so you can get a better understanding as to what you might be getting into.
Please consult a financial adviser, your tax accountant, and the PDS to decide if any products mentioned here, or elsewhere, are right for you.
What is an ETF?
An ETF is an Exchange Traded Fund.
The exchange is the Australian Securities Exchange (ASX). You can trade it. Buy and sell your share of it, which is referred to as a 'unit'. Your investment goes into a fund, which is managed by a fund manager.
Why Invest in ETFs?
ETFs provide diversification, covering a broad range of asset classes and sectors (such as equities or fixed income).
ETFs offer exposure to investment themes and different markets.
ETFs can be a cost-effective method to diversify your portfolio.
Similar to shares, ETFs are flexible to trade at any time during market hours.
ETFs are highly liquid, making them easy to trade.
Why are ETFs so Popular?
There are a number of reasons why ETFs have become so popular in Australia. These include but are not limited to:
The ability for investors to easily diversify with one trade (make sure the trade costs just $9.50 flat-fee with Selfwealth, otherwise you're eating into your profits).
ETFs are often used as core investments when building a portfolio.
ETFs are typically cheaper than managed funds.
The ability to access foreign markets through the ASX (more on this later!)
Transparency into holdings “ you can view regular disclosures on what assets an ETF holds.
A growing selection of ETFs to choose from.
New ETFs offer exposure to highly sought-after investing themes of the future.
How does an ETF Work?
Let use an example of a $10,000 investment into an ETF. You go into your online trading account and place an order for $10,000 of the Generic Australian Index ETF (not a real ETF by the way...). The fund receives $10,000 of new money. It will then go out and individually buy the underlying assets that comprise that ETF. In the case of the Generic Australian Index ETF, we'll assume it tracks the ASX 200, so the fund manager goes out and buys shares in each company within the index.
The process is a bit more complex than this, but that is the general concept. The reverse happens if you wish to sell the ETF. Most of the time you don't need to wait for the fund to buy or sell the underlying assets to buy or sell yourself.
What Drives the Price of an ETF on the ASX?
When investing directly in shares, 'supply and demand' drives the price of a stock. However, 'supply and demand' for an ETF does not drive the unit price of an ETF.
As the fund manager is buying the underlying assets (e.g. stocks), the values of those underlying assets are what drives the price of a unit in that ETF. If those assets perform well, the price of a unit in the ETF will increase.
The more people that buy the ETF, the more the fund manager goes out and buys the underlying assets. When it comes to selling, the fund manager will sell the assets to allow that investor to exit.
What are the Fees for an ETF?
We are regularly asked about the fees for investing in ETFs, which are referred to as "management fees". This is separate from the brokerage fees when you buy or sell units in the ETF. You don't need to worry about paying ETF management fees directly from your trading account. These fees are calculated daily and automatically come out of the fund's assets and the price of the ETF.
Most funds will include management fees in the calculation of performance. It is typically referenced as net of all fees'. It may also be referenced as the "Management Expense Ratio (MER)", which is the annual management fee expressed as a percentage. This fee is how the fund manager generates revenue from the ETF. The more money in a fund, the more revenue they generate.
There are typically no performance fees or the like. Each fund will display fee information on their website, so make sure to check there before investing in an ETF.
How to Access International Markets with ETFs
It can be quite cumbersome to access international markets directly via their respective exchanges. While Selfwealth offers US share trading, it is tricky and expensive to access other markets like the LSE for UK stocks, or the Nikkei for Japanese stocks.
Some Australian ETFs cover international markets, be it the US, Europe, Asia, and the like. You don't need a different trading account, and exchange rates will be worked into most ETFs. This is a cost-effective way to access international markets as some managers and local brokerage platforms may have higher fees than an ETF.
And of course, an ETF will naturally provide diversification in those markets.
Bear in mind, there may be additional tax considerations for ETFs with international exposure, so please speak to the fund manager and your accountant.
What are the Best ETFs in Australia?
This is the question we're asked most! There is so much choice and the Australian ETF industry continues to grow every year with new products continually emerging. What may be desirable to one investor might not be appropriate for another.
Ultimately, the 'best' ETF is a personal investment decision based on your goals and objectives. Past performance is also no indicator of future performance. But we can tell you which ETFs are the most popular on the Selfwealth platform!
The top 10 most popular ASX ETFs (by value) across the Selfwealth community are:
Vanguard Australian Shares Index ETF (ASX: VAS)
Vanguard Diversified High Growth Index ETF (ASX: VDHG)
Vanguard MSCI Index International Shares ETF (ASX: VGS)
Ishares S&P 500 ETF (ASX: IVV)
Vanguard U.S. Total Market Shares Index ETF (ASX: VTS)
BetaShares Australia 200 ETF (ASX: A200)
Betashares Nasdaq 100 ETF (ASX: NDQ)
Vanguard All-World ex-U.S. Shares Index ETF (ASX: VEU)
Vanguard Australian Shares High Yield ETF (ASX: VHY)
BetaShares Diversified All Growth ETF (ASX: DHHF)
For more information, read about a few of the top ETFs Selfwealth investors buy.
Don't forget, Selfwealth also has a target portfolio option for ETFs. This allows you to automatically align your portfolio with the top 10 ETFs held in the portfolios of the best investors from our 120,000+ strong community.
Important disclaimer: SelfWealth Ltd ABN 52 154 324 428 (“Selfwealth”) (AFSL 421789). The information contained on this website is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser and/or accountant. Taxation, legal and other matters referred to on this website are of a general nature only and should not be relied upon in place of appropriate professional advice. You should obtain the relevant Product Disclosure Statement for any product mentioned and consider its contents before making any decision.
