A Beginner's Guide To Australian Etf Investing

Exchange-traded funds (ETFs) are a low-cost way to earn a return similar to an index or a commodity. They can also help to diversify your investments. You can buy and sell units in ETFs through a stockbroker, the same way you buy and sell shares.

An ETF is a managed fund that you can buy or sell on an exchange, like the Australian Securities Exchange (ASX) or Cboe Australia (CXA). When you invest in an ETF, you don't own the underlying investments. Instead, you own units in the ETF, and the ETF provider owns the shares or assets.

In Australia, most ETFs are passive investments that don't try to outperform the market. The fund manager of a passive investment tracks the value of an index, for example, the ASX200 or S&P500, or a specific commodity, such as gold. The value of the ETF goes up or down with the index or asset they're tracking.

ETFs can be bought and sold via brokers who will take your order and execute the trade on your behalf on the ASX. There are two types of brokers: online brokers and full-service brokers. Online brokers, such as Commsec, Nabtrade, Westpac Online Investing and ANZ Share Investing, buy and sell ETFs on your behalf when you provide instructions via an online platform or website. Typically, they do not offer investment recommendations or a personalised service and, as a result, charge a lower fee than full-service brokers.

Full-service brokers buy and sell ETFs on your behalf and offer a personalised service, which can sometimes include investment recommendations tailored to your circumstances and needs. This type of broker essentially becomes an adviser to you and is typically available to talk to you on the phone or meet with you face-to-face. This higher level of service typically comes with higher fees.

Passive vs active ETFs

Exchange-traded funds (ETFs) are a simple and cost-effective way to gain access to a wide range of asset classes. They are open-ended funds traded on the Australian Securities Exchange (ASX), just like ordinary shares. ETFs can be further categorised as passive or active.

Passive ETFs

Passive ETFs aim to track a particular benchmark or index, such as the S&P/ASX 200 or the S&P 500. They tend to follow a buy-and-hold strategy and have lower fees than active ETFs. Passive ETFs are also more transparent, as they are required to disclose their holdings daily. Due to their low cost and passive investment strategy, passive ETFs are a popular choice for investors seeking a long-term, buy-and-hold approach.

Active ETFs

Active ETFs, on the other hand, involve a fund manager actively managing the portfolio to try to outperform a benchmark. The fund manager undertakes stock research and actively adjusts the weightings of the stocks depending on valuations, industry trends, and macroeconomic views. Active ETFs have higher fees due to the active management and research involved. They are also less transparent, as they are not required to disclose their holdings daily. Active ETFs may be attractive to investors seeking the potential for returns that outperform the broad market and other indexes.

Comparison

While passive ETFs offer low costs and transparency, active ETFs aim to deliver above-average returns through active management. Passive ETFs tend to be a more passive, long-term investment strategy, while active ETFs involve more active trading and higher costs. Ultimately, the choice between passive and active ETFs depends on an investor's risk tolerance, investment goals, and preferences.

Brokerage accounts

To buy and sell ETFs, you need to open a brokerage account. This is an account that allows you to purchase and hold investments, including ETFs and other assets like stocks. You can open a brokerage account through a firm or an online broking service.

In Australia, an online broking service is often referred to as a share trading account. Most major banks offer online brokerage services, such as CommSec, Nabtrade, Westpac Online Investing, and ANZ Share Investing. Non-bank examples include Bell Direct, CMC Markets, SelfWealth, and Superhero.

When choosing a broker, consider the following:

• Fees: Check for trading, maintenance, and administration fees. Many brokers no longer charge maintenance or administration fees, and some ETFs trade without stock trading fees.
• Minimum deposit: Look for affordable minimums or no minimum, especially if you're a beginner. For ETFs, the minimum is generally the cost of one share.
• Types of assets: Not all brokers allow you to purchase every type of investment. If you want to hold a diverse range of assets in your portfolio, ensure your broker of choice allows you to buy them.
• Customer service: Research the responsiveness and quality of the brokerage's customer support. Check reviews and see how well-received the broker is by the Australian investing community.
• Special features: Consider any additional features the brokerage offers, such as financial advice and planning tools.

You can also consider using a robo-advisor, which constructs and maintains a diversified portfolio of ETFs for you. While this service incurs management, investment, and sometimes administration fees, it can be a convenient option for those who don't want to actively manage their portfolio.

Step-by-Step Guide to Opening a Brokerage Account

Here's a general step-by-step guide to opening a brokerage account:

• Choose a broker: Select an online or full-service broker based on your needs and investment strategy.
• Visit the broker's website: Go to the website of your chosen broker.
• Find the option to open an account: Look for a button or link to open an account or become a customer.
• Provide personal details: You'll typically need to provide your name, address, date of birth, contact information, and tax file number for identity verification.
• Link your bank account: You may have the option to link your existing bank account directly to your brokerage account for easier fund transfers.

Buying ETFs via a Brokerage Account

Once you have a brokerage account, follow these steps to purchase ETFs:

• Log in to your brokerage account: Use your chosen device to access your online brokerage platform or website.
• Enter the ETF's ASX Code: In the trading section, enter the unique ASX Code or "ticker" of the ETF you wish to buy.
• Set your order type to "Buy": Indicate that you want to purchase the ETF.
• Specify the quantity: Enter the number of ETF units you want to buy. This is the dollar amount you want to invest, divided by the ETF's price.
• Choose a "Limit" or "Market" order:

• Limit Order: Request to buy the ETF at a specific price. This gives you greater price certainty but note the expiry date, after which the trade instruction will be cancelled if your stated price isn't met.
• Market Order: Buy the ETF as soon as possible at the best available price.

• Review and confirm your order: Check the details of your purchase, including the ETF, quantity, and price. Confirm the order to finalise the transaction.
• Pay for your ETF purchase: If you've set up a linked bank account, this step should happen automatically. Otherwise, you may need to manually deposit funds into your brokerage account.
• Receive a confirmation: Your broker will typically notify you via email or an in-platform contract note when the order has been completed.

Selling ETFs via a Brokerage Account

Selling ETFs through your brokerage account is a similar process to buying. Here are the general steps:

• Log in to your brokerage account: Access your brokerage platform or website.
• Enter the ETF's ASX Code: In the trading section, input the unique code of the ETF you want to sell.
• Set your order type to "Sell": Indicate that you want to sell the ETF.
• Specify the quantity: Enter the number of ETF units you want to sell.
• Choose a "Limit" or "Market" order:

• Limit Order: Request to sell the ETF at a specific price.
• Market Order: Sell the ETF immediately at the best available price.

• Review and confirm your order: Check the details of your sale and confirm the transaction.
• Receive the proceeds: The money from the sale will typically be deposited into your linked bank account or your brokerage account, depending on your settings.

Additional Considerations

• Brokerage Fees: Buying and selling ETFs through a broker incurs brokerage fees, which typically range from $5 to $15 for ASX-listed ETFs.
• Minimum Investment: Most brokers require a minimum initial investment of $500 for ASX-listed ETFs.
• Timing: For a more accurate ETF price that represents its underlying value, place your trades at least 30 minutes after the market opens. Additionally, consider buying or selling when the market for the underlying asset is open (e.g., if the ETF tracks Asian shares, place orders when Asian stock markets are open).
• Product Disclosure Statement (PDS): Before investing, review the PDS, which contains essential information about the ETF, including its risks, how to buy and sell units, and how to complain if you encounter issues.
• Research: Understand what you're investing in by researching the ETF's performance, underlying assets, and the market or sector it tracks. Diversify your investments to minimise risk.

Investment strategies

There are several investment strategies to consider when investing in ETFs in Australia. Here are some key strategies to keep in mind:

• Diversification: ETFs offer a simple way to diversify your portfolio due to their ability to provide exposure to a wide range of asset classes. By investing in various types of ETFs, such as those focused on stocks, bonds, property, or international securities, you can reduce the risk associated with investing in a single asset class.
• Passive vs Active ETFs: Most ETFs in Australia are passive investments, meaning they aim to replicate the performance of a specific index or market sector. Passive ETFs tend to have lower fees and are a good option for investors who want to track the market performance. On the other hand, Active ETFs are actively managed and aim to outperform the market. These funds may employ high-risk trading strategies and are more suitable for investors who want to beat the market returns.
• Index Tracking: ETFs typically track a specific index, such as the ASX200 or S&P500. By investing in an ETF that tracks a particular index, you can gain exposure to the performance of that index. It's important to evaluate the tracking differences to ensure the ETF aligns with your investment goals.
• Risk Management: ETFs can help manage risk by providing diversification and allowing you to invest in a range of asset classes. However, it's important to remember that ETFs are still subject to market risk. The value of your ETF investment can decrease if the market or sector being tracked by the ETF declines.
• Cost-Effectiveness: ETFs are known for their low costs compared to other investment options. They provide access to a diversified portfolio of assets at a lower price point than purchasing individual securities. However, it's important to consider the fees associated with buying and selling ETFs, such as brokerage fees and management expense ratios (MERs).
• Liquidity: ETFs offer high liquidity, allowing investors to buy and sell units during trading hours on stock exchanges. This provides flexibility and the ability to enter or exit investments quickly.
• Tax Considerations: ETFs can provide tax benefits due to their structure. For example, they may distribute capital gains or dividend income, which can be taxed at lower rates than other investment types. However, it's important to consult with a tax professional to understand the specific tax implications for your situation.
• Long-Term Investing: ETFs are typically suitable for long-term investment strategies due to their low costs and diversification benefits. Regularly investing a set amount through dollar-cost averaging can help reduce risk and build wealth over time.
• Brokerage Accounts: To invest in ETFs, you will need to open a brokerage account with an online or full-service broker. Online brokers offer a DIY platform with lower fees, while full-service brokers provide personalised investment recommendations and a higher level of service at a higher cost.
• Research and Due Diligence: It's crucial to conduct thorough research before investing in ETFs. Evaluate the ETF's underlying index, performance, fees, and risk factors. Additionally, consider seeking financial advice or using a robo-advisor for automated portfolio management.

ETF research

Exchange-traded funds (ETFs) are a low-cost way to earn a return similar to an index or a commodity. They can also help to diversify your investments. ETFs are funds that trade on a stock exchange, like ordinary shares. They combine the investment advantages of a managed fund with the ease and cost-effectiveness of share trading.

When you invest in an ETF, you don't own the underlying investments. You own units in the ETF, and the ETF provider owns the shares or assets. ETF units can be created or redeemed to match investor demand. This helps the price of the units to stay close to the net asset value (NAV) of the ETF.

Types of ETFs

There are two main types of ETFs: passive and active. Passive ETFs, which are designed to track the performance of an index, are the most common. Active ETFs, on the other hand, aim to outperform an index and are actively managed by professionals.

• Asset allocation: Determine your asset allocation, or what percentage of each type of investment security you'll want to reach your goals.
• Risk tolerance: Consider how willing you are to take on the risk of losing money for greater gains.
• Time horizon: The further away your goal, the more time you have to recover from any short-term dips in the value of your investments.
• Fees: Fees can have a large impact on your final return, so choose ETFs with competitive price points.
• Investment strategy: Decide on your investment strategy, such as whether you want to focus on specific sectors or track broad indices.

Where to buy ETFs in Australia?

You can buy ETFs in Australia through a brokerage account, either with a firm or an online broking service. You can also buy ETFs directly from the ETF provider or through a micro-investing platform.

Example of an ETF in Australia

As an example, consider the iShares S&P/ASX 200 ETF (ASX: IOZ), which is a basket of the 200 largest companies in Australia. One unit of this ETF costs $30, and the ETF provider will allocate your investment across the 200 companies in the index.

Purchase plans

Most of the time, buying ETFs isn't a one-and-done thing. You'll want to buy regularly to help you reach your investing goals. Luckily, most brokers allow you to set up a purchase plan.

Arrange for a set amount of money to be transferred from your bank account into your investment account on a regular basis. Then, you can instruct the broker to buy as many shares or units as possible with the money in your account.

This strategy of regularly investing a set amount of money is known as dollar-cost averaging, and using it consistently may help you to reduce risk in your portfolio over time. This is done by spreading out your investments across multiple prices, rather than risking purchasing a large number of shares at an inopportune time. However, the trade-off to this is that you are not invested in the market for a longer period, and instead invest smaller amounts over time. Ultimately, many of us who invest from our paychecks do not have the choice to invest in a lump sum so dollar-cost averaging is our only option.

While setting up your plan to buy ETFs, you should also consider how often you'll check up on your portfolio. Most experts recommend checking every six to 12 months to ensure your asset allocation hasn't shifted too much due to certain asset classes performing particularly well or poorly.

If your holdings have shifted significantly from your desired breakdown, you may want to buy and sell certain investments to bring yourself back to your desired level of risk. It is important to remember that selling does incur transaction costs and taxes in most instances. As such, if you have a long-time horizon, you may want to do this less frequently. You can also elect to set a range that you're comfortable with instead of a set percentage. This will help to reduce unnecessary costs and taxes. For example, you may have a range of 70% to 80% in stocks, instead of 70%. This isn't necessarily a complicated or time-consuming process, but if you'd prefer to set it and forget it with your investment portfolio, a robo-advisor can do this for you automatically.

Frequently asked questions