How To Buy The Best Index Funds and ETFs In Australia

 

ETFs and Index Funds offer investors safe and low-risk options as passive investments. Diversification is a crucial factor in successful investing.

 

Instead of investing in individual shares, index funds allow investors to allocate their funds across multiple financial assets in a single trade.

 

This blog provides a comprehensive guide to investing in Australia's top index funds and ETFs. Discover why including them in your investment portfolio can be a smart choice.

 

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1. What is a Index (Indice)?

 

Before delving deeper into Index Funds and ETFs, let's first clarify what an index is.

 

An index is a collection of financial assets, like stocks or bonds, grouped based on specific rules.
 

It helps people see how these items are performing as a whole, giving insights into the overall health of the financial market. Investors use indexes to make informed decisions about their investments.

 

 

2. What Is An Index Fund?

 

To understand index funds, consider them as a replication of specific indices (indexes) comprising bonds, stocks, or other financial assets. A fund manager raises money from investors by selling units in the fund, using it to buy assets that mirror the index's composition.

 

The manager charges an annual fee based on a percentage of the investment to oversee the fund's alignment with the index.

 

Index funds are ideal for retail investors seeking portfolio diversification across various assets in a single trade. 

 

 

3. What Are ETFs?

 

ETFs are index funds traded on the ASX, functioning like ordinary shares and popular among Aussie investors. You can buy them during regular trading hours.
 

They offer low-cost management with returns comparable to commodities or index funds, making them suitable for investors seeking exposure to various stocks and diversification. It is the quickest and most straightforward way to expose yourself to indexes.

 

Most share trading accounts allow buying ETFs. You only need to find the ETF Index name on the ASX to invest in them. It's precisely the same as purchasing ordinary shares.

 

As an example, one of many popular ETFs in Australia is the iShares Core S&P ASX 200 ETF.

 

 

4. What is the Difference Between Index Funds and ETFs?

 

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

• You need an account with a broker to trade an ETF, 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 compared to index funds, which fund managers manage.

• ETFs are primarily traded as intraday shares and can generate higher profits. Index funds trade in securities through AMC and offer the investor more security and low risk.

 

 

 

 

5. What Are The Different Ways To Invest In 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 ensuring the index fund performs the same as the index.

 

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

 

 

Option 1: Buy Exchange Traded Fund (ETFs) on ASX

 

• Many investment funds provide the facility to trade securities listed on the ASX 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 2: Managed Fund

 

• In this investment option, your money is in one pool 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.

 

 

6. Steps To Buy Index Fund ETFs on ASX in Australia

 

 

You can buy an ETF through an online trading platform (broker). Here are the steps to follow to buy your first ETF in Australia:

 

 

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.

 

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Buy Australian & international shares with unlimited commission-free trades. (No brokerage). Other fees may apply.

 

 

 

Step 2: Create An Account With The Broker

 

Once you've compared and selected an ETF broker, the next step is to open a brokerage account with them online.

 

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For most online trading platforms, you must provide details such as name, address, date of birth, and identity proof such as passport/driver's license and tax file number. Next, link your bank account to your trading account.

 

 

Step 3: Buy Your First ETF

 

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

 

1. Log in to the trading account

2. Transfer money into the account

3. Search for the ticker code or name of the ETF you wish to buy and place a "Buy Order" to buy the ETF

4. Track your ETF performance regularly 

 

 

7. 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.

 

 

8. What Are Index Fund ETFs Examples in Australia?

 

You can find below some common ETFs for index funds in Australia:

 

 

 

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

 

 

 

 

9. What Are Common Index Funds In Australia?

 

You can find below some of the most common index funds:

 

 

(Past performance does not guarantee future results.)

 

 

10. What Are The Most Popular Index Funds In The US?

 

Here we have listed a few index funds:

 

 

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 the 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

 

 

 

 

11. What Are Some Popular ASX Index Funds in Australia?

 

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 ASX index funds that include different categories of shares along with funds concentrating on bonds:

 

• Vanguard 500 Index 

• Vanguard Total Stock Market 

• Vanguard Total International Stock Market 

• Vanguard Total Bond

 

 

12. What Are The Benefits And Drawbacks Of Investing In ETFs?

 

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

 

 

Pros

 

• Diversification - They let 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.

 

 

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.

 

 

 

 

13. Frequnetly Asked Questions (FAQs)

 

 

Can You Lose Money With Index Funds?

 

Yes. Risks are always 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 time.

 

As most indexes include hundreds of stocks and other investments, diversification reduces the possibility of incurring significant losses if one or two companies 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 the right fund. Consider the fund's management fee when deciding on a fund, as a high-fee fund can quickly deplete your returns.

 

 

Can You Get Rich Off Index Funds?

 

Yes and No. Index funds offer a simple and successful way for investors of all skill levels to grow their money and achieve financial goals with less research and tracking.

 

These funds pool investors' money in stocks or bonds, matching the market's performance over time and providing long-term growth. The best part is you don't need to be a stock market expert; each fund has a manager handling investments and tracking performance.

Index funds stand out as a high-growth, cost-effective investment compared to actively managed funds, providing tax efficiency by minimising capital gains. Consistent monthly investments can benefit from long-term market growth and generate better returns.

 

Opting for funds with low management fees can further enhance future returns. Check the expense ratio before investing to make the most of your money.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

Here Are Some Low-Cost Schemes with Their Expense Ratios:

 

 

 

 

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.

 

 The following are the different ETF types:

 

• Commodity ETFs

• Australian Sector ETFs

• Australian Broad-Based ETFs

• International Broad-Based ETFs

• International Sector ETFs

• Currency ETFs

• Australian Strategy-Based ETFs

 

 

 

 

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:

 

• Australian shares

• International shares

• Foreign currencies

• International or Australian share market sectors, like financials or mining

• Fixed-income investment instruments like bonds

• Precious commodities and metals

• Crypto assets

 

 

 

Popular Online ETF Brokers In Australia 

 

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

 

 

AFSL 491139. Capital at risk. See PDS and TMD

 

 

 

What Are The Most Popular ETFs in Australia?

 

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

 

• Fund Structure

• Size

• Costs include Operational and transactional fees, Brokerage charges (for purchasing and selling the assets held by the ETF), and Actively managed ETFs that 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 more prominent and well-established ETF issuer with commercially viable and acceptable products. 

 

 

 

(Past performance does not guarantee future results.)

 

 

What Are The Most Traded ETFs In Australia?

 

Below, you'll find cost-effective, widely diversified, and easily tradable ETFs that offer immediate access to specific asset classes.

 

 

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 industrial, consumer discretionary, and materials sectors

• As it involves higher volatility and risk-reward ratio, it can 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 more extensive and 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.

 

 

 

What ETFs Had The Highest Historical Returns in Australia?

 

Australian Broad-Based ETFs

 

 

(Past performance does not guarantee future results.)

 

 

Australian Sector ETFs

 

 

(Past performance does not guarantee future results.)

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

 

15. Conclusion

 

Knowing what index funds and ETFs are and their different types can set you on a path to make smart investments that can grow your money over the long haul.

 

Nevertheless, it is vital to thoroughly review the product disclosure statement and engage in discussions with your financial advisor before committing your funds to ensure that you choose a fund that perfectly aligns with your specific financial objectives.

 

If you still need a trading account to buy Index funds and ETFs, consider eToro, used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

 

(eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD)

 

 

 

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