Exchange-Traded Funds (ETFs) explained

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 the stockmarket 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. 

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.

To learn more about how to buy and sell ETFs, visit CommSec Learn.