Index Fund & ETF Investing In Australia: A Complete Guide

Students want to know the difference between index funds and ETFs and how they can buy both in Australia.

 

Diversification is a key component of investing. Both ETFs and Index Funds are passive forms of investments that offer relatively safer and low-risk investment options for investors. 

 

Rather than investing in one share, index funds allow investing money across a range of financial assets in a single trade. In this way, investors get instant and low-cost diversification benefits. To reduce even more risk, the funds allow users to further diversify within each asset class.   

 

So, in this blog, let us look at how to invest in index funds and why they may be worth occupying a place in your investment portfolio.

 

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1. What Is An Index Fund And How Does It Work?

 

Before we investigate index funds, it is necessary to understand what an index is. An index is a group of bonds, commodities, currencies, cryptocurrencies, stocks, or other financial assets combined based on specific criteria.

 

An index fund replicates the performance of a specific index of bonds, stocks, or other financial assets. The fund manager sells units in the fund to raise money from investors. With this money, he buys assets that match the index fund composition.

 

The fund manager charges an annual management fee as a certain percentage of the investment to administer the fund and ensure that it matches the index composition.

 

Index funds are a good investment for retail investors as it allows them to diversify their portfolio across a range of bonds, stocks, or other assets in a single trade.

 

Index funds traded on the ASX are called exchange-traded funds. They are bought or sold almost like ordinary shares, which makes them easily accessible for investors.

 

 

2. What Options Are Available For Investors To Buy Index Funds?

 

An index fund is an investment that tracks a market index, typically made up of stocks or bonds. Index funds invest in all the components present in the index they track. They have a dedicated fund manager responsible for making sure the index fund performs the same as the index.

 

You can invest in an Index Fund in three different ways, depending on your investment preferences and circumstances:

 

 

Option 1: Managed Fund

 

  • In this investment option, your money is pooled with other investors.

  • The fund manager supervises the fund aiming to follow an index 

  • The fund manager charges a small percentage of your invested amount as a fee. 

  • This form of investment vehicle is called a ‘passively managed fund’. 

  • As it requires keeping minimum balances, managed funds are ideal for people who can invest large amounts.

 

 

Option 2: Exchange Traded Fund (ETFs)

 

  • Many investment funds provide the facility to trade securities listed on the stock exchange. ETFs are a group of securities that track indices. 

  • Unlike managed funds, there is no minimum investment threshold to trade in an index fund through an ETF. 

  • With ETFs starting from as low as $100, it is an ideal option for those with a smaller amount to invest.

  • ETFs charge lower fees from investors to manage the investment. You must also pay a ‘brokerage’ fee to buy and sell ETFs.

 

 

Option 3: Investment Platform

 

  • It is ideal for those who want to manage their investments by themselves

  • This option enables investors to invest directly in different managed funds with a lower minimum balance threshold. 

  • Although this option is not expensive, it charges an administrative fee on top of the investment fees.

  • Users get consolidated reports periodically that help them track their investments.

 

 

3. Steps To Investing In Index Funds

 

Follow this 3-step process to start your investment journey in index funds:

 

 

Step 1: Choose an Index You Want To Track Using Index Funds

 

  • Some indices depend on specific investment styles or themes, such as high-value or growth shares or firms or rapid-growing companies that pay high dividends. 

  • You can also find indices that comprise shares in “only local markets”, “only international markets”, or a combination of local and international markets. 

  • Some indices depend on evolving macro trends. They comprise companies that benefit when a rise in interest rates.

 

In addition to broad indexes, you can also find:

 

  • Sector indexes that are associated with specific industries

  • Country indexes that focus on stocks in a single nation 

 

 

Step 2: Select The Right Fund For Your Index

 

After selecting the index, find at least one index fund that closely tracks the index performance.

 

Choose the one that has the lowest costs. Also, find out whether there are any limitations on the index fund and does the fund provider have other index funds you are interested in.

 

 

Step 3: Purchase Index Fund Shares

 

The last step to investing in your chosen index fund is to open a brokerage account to begin trading shares of the index fund. Alternatively, you can open one with the mutual fund firm that offers that fund.

 

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4. Index Funds Vs ETF

 

  • ETFs are available for trading during the usual trading day/hours, whereas with index funds, you can only trade at a specified price at the end of the trading day.

  • You need a Demat account to trade in an ETF fund, which isn’t necessary in the case of an index fund. 

  • The expense ratio in ETFs is comparatively lower than that of index funds.

  • ETFs provide flexible trading options as compared to index funds, which are managed by fund managers.

  • In the case of an ETF, the valuation is constantly. However, in the case of index funds, it is done at the end of the trading day.

  • ETFs are traded most of the time intraday shares and generate higher profits. Index funds trade in securities through AMC and offer more security and low risk to the investor.

 

 

5. Index Funds Vs Mutual Funds

 

Mutual funds are investment instruments that make it convenient for investors to create a diversified portfolio. A single mutual fund exposes investors to multiple securities, such as stocks, bonds, and short-term debt. The fund manager invests the money on behalf of the investors.

 

Mutual funds distribute their capital gains to investors, which incurs capital gains taxes on investors. The more transactions a fund manager makes the more opportunities for the fund to generate profit and distribute them across investors.

 

Index funds are a form of mutual fund that tracks the performance of a market index, like the S&P 500. Unlike mutual funds, it imitates a portion of the market instead of trying to outperform it.

 

Since Index funds come with lower management fees than actively managed mutual funds, it makes them attractive to several investors. It is an ideal option for those who aren’t looking for a fund in a specific sector and with a strategy that aims at generating higher returns. Mutual funds have higher investment costs compared to index funds.

 

More-frequent trades in mutual funds can result in higher tax liability. As in index funds, fund managers tend to make fewer transactions, which usually realize fewer gains and create less tax liability in the short term.

 

 

6. Are Index Funds A Good Investment?

 

Here are the benefits of investing in a good index fund:

 

  • It offers a strong diversification that enables investors to invest their money across a range of assets in just one trade.

  • Index funds returns are steady and more dependable over time.

  • Ideal for beginner investors

  • Lower fees

  • Many index funds also distribute regular dividends to their unitholders.

 

 

7. What Is An Example Of An Index Fund?

 

Let us talk about index funds examples in detail: 

 

 

Vanguard Australian Shares Index ETF

 

  • Net assets: $11 billion (as of April 2022)

  • Management fee: 0.1% per annum

  • Net transaction cost: 0.02% per annum

  • Distribution frequency: quarterly

 

 

iShares S&P 500 ETF AUD

 

  • Net assets: $5.1 billion (as of April 2022)

  • Management fee: 0.04% per annum

  • Distribution frequency: quarterly

 

 

SPDR S&P/ASX 200

 

  • Net assets: $4.8 billion (as of April 2022)

  • Distribution frequency: quarterly

  • Management costs: 0.13% per annum

 

 

iShares Core S&P/ASX 200 ETF

 

  • Net assets: $4.7 billion (as of April 2022)

  • Management fee: 0.09%

  • Distribution frequency: quarterly

 

 

Vanguard MSCI Index International Shares ETF

 

  • Net assets: $4.6 billion (as of April 2022)

  • Distribution frequency: quarterly

  • Management fee: 0.18% per annum

  • Net transaction cost: 0.02% per annum

 

 

8. Are There Any Index Funds In Australia?

 

Check out this list of index funds:

 

Company Market Cap Benchmark Index
Vanguard Australian
Shares Index ETF
$10.6 billion S&P/ASX 300 Index
iShares Core S&P 500
ETF AUD
$5.1billion S&P 500 index fund
SPDR S&P
ASX 200
$4.8 billion S&P/ASX 200 Index
iShares Core S&P
ASX 200 ETF
$4.7 billion S&P ASX 200 Accumulation Index
Vanguard MSCI Index
International Shares ETF
$2.8 billion MSCI World ex Australian Accumulation Index

 

 

9. What Are The Most Reliable Index Funds?

 

Vanguard Index funds are an easy entry point for beginner investors. Being a low-risk investment, they offer stable returns to investors.

 

Here we have discussed a few index fund ideas to help you invest better:

 

 

Vanguard 500 Index - (NYSEMKT: VOO)

 

  • Tracks S&P 500 index
  • $4 yearly fee for a $10,000 investment

 

 

Vanguard Total Stock Market - (Nasdaq MutFund: VTSAX)

 

  • Tracks index of U.S. stocks of varying sizes
  • $4 yearly fee for a $10,000 investment

 

 

Vanguard Total International Stock Market - (NASDAQ: VXUS)

 

  • Tracks index of global stocks that excludes the U.S.

  • $11 yearly fee for a $10,000 investment

 

 

Vanguard Total Bond - (Nasdaq MutFund: VBTLX)

 

  • Tracks index of different types of bonds

  • $5 annual fee for a $10,000 investment

 

 

10. What Are The Best ASX Index Funds?

 

ASX index funds are a convenient and affordable way to quickly gain exposure to a diversified financial asset portfolio, including shares. These funds allow you to invest using asset allocation strategies to help manage risk while receiving a good return.

 

Below are the top ASX index funds that include different categories of shares along with a fund concentrating on bonds:

 

  • Vanguard 500 Index 

  • Vanguard Total Stock Market 

  • Vanguard Total International Stock Market 

  • Vanguard Total Bond

 

 

11. Can You Get Rich Off Index Funds?

 

Index funds offer a simple and successful way for investors of all skill levels. It is a great solution to grow your money and achieve your financial goals without doing much research and performance tracking regularly.

 

It is a financial vehicle that pools investors’ money and invests it in stocks or bonds. By matching the performance of the financial markets over time, this cost-effective investment tool funds can turn your small savings into a large corpus in the long run.

 

The best thing about this investment is that you don’t need to be a stock market expert to buy index funds. Each index fund has a portfolio manager that invests in an index and tracks its performance.

 

Another feature that makes them a high-growth investment tool is that it is less pricey than actively managed funds. Furthermore, investments in these funds are tax-efficient in comparison to other investments.

 

It is because index funds don't excessively buy and sell their holdings as actively managed funds. It, in turn, avoids generating capital gains that can increase your tax liability over time.

 

When investing small amounts consistently every month, you can benefit from the long-term market growth and generate better returns from your investment.

 

Choosing funds that charge low management fees can further help grow your returns in the future. Check the fund's expense ratio before investing your hard-earned money. 

 

Here are the top low-cost schemes along with their expense ratios:

 

Name of Index Fund Expense Ratio
Vanguard S&P 500 ETF 0.03%
iShares Core S&P Total US Stock Market 0.03%
Schwab U.S. Large-Cap ETF 0.03%
Schwab U.S. Broad Market 0.03%
Vanguard Mid-Cap ETF 0.04%
Schwab U.S. Mid-Cap ETF 0.04%
Vanguard Small-Cap ETF 0.05%
Vanguard Total Stock Market 0.04%
Vanguard Large-Cap ETF 0.04%
iShares Core S&P Small-Cap ETF 0.06%

 

 

12. Can You Lose Money In Index Funds?

 

There are risks involved in every instrument you trade in the stock market. Where stocks are risky and high-return instruments, index funds involve low risk and offer average returns over a long time.

 

As most indexes include hundreds of stocks and other investments, diversification reduces the possibility of incurring significant losses if one or two companies in the index fail to perform as expected.

 

With so many different niche funds available, it is necessary to do your research before investing. Understand your investment objectives and ensure that the fund aligns with the historical index fund returns.

 

As many index funds cater to investing styles like value or growth investing, ensure you choose a fund that is right for you. Always consider the fund’s management fee when deciding on a fund, as a high-fee fund can quickly deplete your returns.

 

 

13. What Are ETFs?

 

Exchange-traded funds or ETFs are popular among several Aussie investors. They are low-cost managed funds where you earn a return comparable to a commodity or an index fund. ETFs are bought and sold on an exchange, such as the ASX.

 

ETFs can be a good option for investors looking for a relatively low-cost product who want exposure to different stocks.

 

The high level of diversification makes them ideal for risk-averse investors.

 

One of the best ETF funds in Australia is the Australian iShares Core S&P ASX 200 ETF which has outperformed other funds and given consistently high returns to investors over the long term.

 

 

14. What Are The Different Types Of ETFs?

 

ETFs are an appealing and highly liquid investing option. They give access to a wide range of asset classes and individual assets in one trade. ETFs are classified into the following types:

 

  • Commodity ETFs

  • Australian Sector ETFs

  • Australian Broad-Based ETFs

  • International Broad-Based ETFs

  • International Sector ETFs

  • Currency ETFs

  • Australian Strategy-Based ETFs

 

 

15. What Are The Different Assets In Which An ETF Invests Your Money?

 

An ETF invests your money in a range of asset classes and individual assets that includes:

 

 

 

16. How To Buy An ETF In Australia?

 

In Australia, you can buy an ETF through a brokerage firm. Here is a step-wise guide to help you buy your first ETF.

 

 

Step 1: Choose A Broker

 

To trade your preferred ETF, you need to find a broker who gives you the facility. The broker will take your buy/sell order and execute the trade on your behalf on the Australian Stock Exchange.

 

 

Types of Brokers

 

  • Online brokers: These brokers offer online brokerage services through their application or website. They execute the trade per the user’s instructions to buy and sell ETFs. What makes them different from full-service brokers is that they charge a lower fee than full-service brokers and don’t offer personalized service or investment recommendations to their users.

 

  • Both banking and non-banking institutions have online broking services in Australia, such as Banks: Westpac Online Investing, Nabtrade, Commsec, and ANZ Share Investing. Non- Banks: CMC Markets, Bell Direct, Superhero, and SelfWealth.

 

  • Full-service brokers: Besides online ETF trading services, full-service brokers also offer investment recommendations per their client’s needs and circumstances face-to-face or over the phone. For this extra service feature, they charge higher fees to their clients.

 

 

Step 2: Create An Account With Your Broker

 

After you compare and choose an ETF broker, the next step is to open a brokerage account with an online broker to start buying and selling ETFs.

 

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To open an account, you must provide details such as name, address, date of birth, and identity proof such as passport/driver’s license and tax file number to confirm your identity. Next, link your bank account to your trading account.

 

 

Step 3: Buy An ETF

 

Once your trading account is up and running, follow the below steps to buy an ETF.

 

  • Log in to the trading account

  • Transfer money into the account

  • Search for the ticker code or name of the ETF you wish to buy and place a “Buy Order” to buy the ETF

  • Track your ETF performance regularly 

 

 

17. Top Online ETF Brokers In Australia 

 

These are the best online trading platforms to access Index funds in Australia:

 

ETF Broker Name Brokerage on Australian ETFs Inactivity Fee Markets
IG Share Trading AUD 8 No ETFs, ASX shares, US shares, UK shares, etc.
Superhero $0 No ETFs, ASX shares, and US shares
eToro NA USD 10 if the account has been inactive for the last 12 months ETFs, Global shares, and US shares
CMC Markets Invest $0 No ETFs, Global shares, ASX shares, mFunds, etc.
SAXO Markets $5 No ETFs, Global shares, and ASX shares
Tiger Brokers $6.49 No ETFs, ASX shares, Global shares, Options trading, and US shares
Monex $19.95 No ETFs, Global shares, ASX shares, US shares, etc.
Bendigo Bank $19.95 No ETFs, ASX shares, Global shares, mFunds, Warrants, Options trading
Bell Direct Share Trading $15 No ETFs, ASX shares, and mFunds
Go Markets $7.70 No ETFs, ASX shares, Forex, and CFDs
Moomoo $8.80 No ETFs, ASX shares, and US shares

 

 

18. Benefits And Drawbacks Of Investing In ETFs

 

Before you invest in ETFs, it is required to weigh up their pros and cons:

 

 

Pros

 

  • Diversification – It lets you purchase a basket of assets or shares in a single trade. Moreover, you can diversify your investments within an asset class. 

  • Transparency – As ETFs publish the asset’s net value daily on the ASX, it becomes easier to track the performance of the underlying assets. 

  • Low cost – Most ETFs are cheaper than actively managed funds.

  • Easy to trade – You can easily buy ETFs during the trading hours of the ASX exchange.

 

 

Cons

 

  • Market risk – With the fall in the market, the value of your ETF investment also reduces.

  • Currency risk – ETFs that invest in foreign assets are exposed to currency fluctuations that can impact your returns

  • Liquidity risk – ETFs that invest in non-liquid assets may be difficult to create or redeem the securities later.

  • Tracking errors – The ETF may move away from the index/asset value due to the illiquidity of the assets, taxes, fees, and other factors.

 

 

19. Top 5 ETFs Australia

 

To find the best ETF, you need to compare it on the following factors:

 

  • Fund Structure

  • Size

  • Costs such as:

    • Operational and transactional costs

    • Brokerage charges (for purchase and selling the assets held by the ETF)

    • Actively managed ETFs can cost more when managers operate in research-intensive sectors or emerging trends.

  • Spread

  • Liquidity: how easily and quickly can the ETF be purchased or sold at a price that reflects its intrinsic value

  • Returns/Performance

  • Track record of the ETF and its issuer: Choose a larger and well-established ETF issuer with commercially viable and acceptable products. 

 

Considering the above factors, Vanguard Australian Shares Index Fund is the best vanguard ETF in Australia.

 

ETF NAME (ASX Code) SIZE ($B) Cost: MER (% P.A.) Spread Liquidity Daily $M Returns
(5-year)
Index History
SPDR S&P/ASX
200 ETF (STW)

4.1

0.13

0.06

$15.0m

8.1%

22 years
Vanguard ETF
Australian Shares Index Fund (VAS)

10.4

0.10

0.03

$54.7m

8.3%

22 years
iShares Core
S&P/ASX 200 ETF (IOZ)

4.1

0.09

0.06

$19.1m

7.9%

22 years
VanEck Vectors
Australian Equal Weight ETF (MVW)

1.6

0.35

0.08

$2.6m

7.0%

19 years
BetaShares
Australia 200 ETF (A200)

2.1

0.07

0.05

$13.1m

N/A

11 years

 

 

20. Best ETF’s In Australia

 

The following are the low-cost, highly diversified, and highly liquid investment vehicle that provides instant exposure to specific asset classes.

 

After analyzing and reviewing the Australian ETF performance, we have come up with a list of 4 ETFs in Australia that are the best in the market.

 

ETF CODE ETF NAME 1-YEAR RETURN
OOO Betashares Crude Oil Index ETF-Currency Hedged (Synthetic)
79.5%
FUEL BetaShares Global Energy Companies ETF – Currency Hedged 43.5%
HACK BetaShares Global Cybersecurity ETF 31.9%
OZR SPDR S&P/ASX 200 Resource Fund 30.6%

 

 

iShares Core S&P ASX 200 ETF (ASX: IOZ)

 

  • Offers low-cost exposure to the 200 largest companies listed on ASX in one fund

  • It has domestically focussed Australian portfolios with certain weightage towards financials and mining stocks.

 

 

Vanguard MSCI Australian Small Companies ETF (ASX: VSO)

 

  • Offers exposure to a diversified portfolio of small-cap companies

  • Tracks the MSCI Australian Shares Small Cap Index.

  • Invests mainly in industrials, consumer discretionary, and materials sectors

  • As it involves higher volatility and risk-reward ratio, it has the potential to generate higher long-term capital growth.

 

 

Betashares Crypto Innovators ETF (ASX: CRYP)

 

  • Tracks the performance of global companies that leads the crypto economy, such as Riot Blockchain, Microstrategy, and Coinbase.

  • Offers exposure to cryptocurrency within the ETF structure

  • Due to the highly unpredictable nature of cryptocurrency, this ETF is suitable only for investors with a high-risk tolerance.

 

 

Vaneck Vectors Video Gaming & eSports ETF (ASX: ESPO)

 

  • Provides exposure to the thriving video gaming industry, including video gaming, media, entertainment, and sports

  • High potential growth sector due to its extensive youth adoption and sustained technological advancement

  • This ETF holds shares of companies such as EA, Nvidia, Roblox, Nintendo, Activision Blizzard, and Metaverse

 

 

BetaShares Global Cybersecurity ETF (ASX: HACK)

 

  • Tracks globally leading companies related to the cybersecurity sector. As long as there are cybercrimes, the demand for this sector will grow.

  • This ETF is popular among investors who invest mainly in domestic stocks such as Zscaler, Crowdstrike, and evolving players worldwide.

 

 

BetaShares S&P ASX 200 Resources Sector ETF (ASX: QRE)

 

  • This ETF tracks the largest ASX-listed companies in the resources sector, such as BHP, Rio Tinto, and Woodside Petroleum. 

  • The stocks listed in this ETF are cyclical and impacted by global crises.

 

 

BetaShares Global Energy Companies ETF (ASX: FUEL)

 

With this ETF, investors get exposure to the larger and more geographically diversified global energy companies such as Chevron, Shell, BP, and ExxonMobil.

 

 

VanEck Vectors MSCI International Sustainable Equity ETF (ASX: ESGI)

 

This ETF provides a diversified portfolio of sustainable international companies worldwide and excludes companies related to mining, thermal coal, gas or oil, and high carbon emitters.

 

 

21. Which ETF Has The Highest Return In Australia?

 

Highest Three-Year Returns – Australian Broad-Based ETFs.

 

ETF Name 1-year Return 3-year Return 5-year Return Management Fee
VanEck S&P/ASX

MidCap ETF
6.30% 12.35% 10.57% 0.45%
Vanguard MSCI Australian

Small Companies Index ETF
3.50% 10.47% 10.66% 0.30%
Vanguard MSCI Australian

Large Companies Index ETF
6.30% 8.96% 9.33% 0.20%
BetaShares FTSE RAFI

Australia 200 ETF
8.73% 8.57% 8.76% 0.40%
SPDR S&P/ASX 200

Financials EX A-REIT Fund

4.32%

5.88%

4.94%

0.34%

 

 

Highest Three-Year Returns – Australian Sector ETFs

 

ETF Name 1-year Return 3-year Return 5-year Return Management Fee
BetaShares Australian

Resources Sector ETF

15.53%

14.10%

17.16%

0.39%

VanEck Australian

Resources ETF

24.12%

13.58%

16.24%

0.35%

SPDR S&P/ASX 200

Resources Fund

15.52%

13.41%

16.69%

0.34%
VanEck Australian

Banks ETF

7.44%

8.40%

7.40%

0.28%
SPDR S&P/ASX 200

Financials EX A-REIT Fund

4.32%

5.88%

4.94%

0.34%

 

22. Conclusion

 

Now that you know what index funds are and their types, you can start investing and building long-term wealth.

 

However, before choosing the index fund, always read the product disclosure statement, and talk to your financial advisor to park your money in the fund that aligns with your financial goals.

 

If you don't have a trading account for buying index funds and ETFs yet, we recommend the best broker for Australia and worldwide, eToro - You can create an eToro trading account HERE.

 

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