What is an ETF?
ETFs are pooled investments. They own a bunch of different assets such as shares, bonds, indexes and currencies and divide the ownership into units for investors to buy, which are then traded on the stock market 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 underlying 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.
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 three 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. 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.
These include:
- Capital loss: ETFs can go up or down in value, because they're impacted by market changes, economic events, and the companies and industries that they invest in. If you sell your investment when the price is lower than what you paid for it, you'll lose money.
- Tracking error: The ETF might not exactly track its benchmark’s returns. It could report lower or higher performance, depending on a range of factors, such as fees or the cost of doing business.
- Currency risk: If you buy an ETF that invests in overseas companies or assets, a change in the value of the Australian Dollar might affect the value of your investment. Currency-hedged ETFs can lower this risk for a higher fee.
- Liquidity risk: If an ETF invests in assets that could be harder to sell in certain circumstances, you might not be able to sell your units when or at the price you want.
- International taxes: If you buy units in an ETF that's located overseas, you might have to pay foreign taxes.
- Counterparty risk: This is the chance the issuer of the fund goes into insolvency.
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.
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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Important information
This information is not advice and is general in nature. The information has been prepared without taking account of the objectives , financial situation or needs of any particular individual. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to the individual's objectives , financial situation or needs, and, if necessary, seek appropriate professional advice. You can view the CommSec Pocket Terms and Conditions, Product Disclosure Statements, Best Execution Statement and Financial Services Guide, and should consider them before making any decision about these products and services. Consider the PDS for each ETF prior to making an investment decision.
Past performance is no guarantee of future performance.