How to invest in ETFs in Australia
Exchange-traded funds (ETFs) are becoming a more enticing method for investors to affordably and conveniently diversify their portfolios. Investing in the share market can be a suitable method for securing your financial future, and many new investors will learn how to buy ETFs using an online brokerage account or investing platform like Stake.
This article focuses on how to buy ETFs in Australia, however, it is not a recommendation to invest in them and should not be taken as financial advice. Do your own research and make your own decisions, or even consider getting advice from a licensed financial adviser before investing.
Here’s where you can get started:
- What is an exchange-traded fund?
- Why have ETFs become so popular?
- How to start investing in ETFs
- How much money do you need to invest in ETFs?
- How much do ETFs cost?
- What ETFs are good for beginners?
- What are some ETF investment strategies?
- What are the risks of exchange-traded funds?
- Are ETFs better than a managed fund?
What is an exchange-traded fund?
They’re an investment vehicle from an ETF provider that uses funds directly from investors to purchase individual stocks, bonds and other securities that track the performance of indices and asset classes.
In essence, you could consider an ETF to be a pooled investment security that passively tracks the performance of a particular index or commodity. However, there are a growing number of actively managed ETFs that have a manager investing in securities in an effort to outperform the underlying index.
While exchange-traded funds appear to operate in a similar capacity to mutual funds, they are not quite the same. One of the fundamental differences is you can buy and sell ETFs as shares on a stock market such as the Australian Securities Exchange (ASX) or Nasdaq.
🎓 Learn more: Exchange-traded funds: What they are and how they work?
Why have ETFs become so popular?
ETF investing has become a popular topic of conversation among investors of all experience levels as a means of diversifying simply and affordably.
A growing world of investors
The growing popularity could also be correlated with a growing number of retail investors who want to gain an easy entry point to the markets, an immediately diversified portfolio and a low-cost alternative to purchasing the underlying assets individually.
Another attractive statistic that’s often associated with investing in ETFs can be found by examining the historical returns of some of the more actively traded passive ETFs such as the Vanguard Australian Shares Index ETF ($VAS) or the S&P 500 Vanguard ETF ($VOO). While yearly fluctuations are to be expected when tracking large markets, the long-term investing habits have seen 10-year positive returns for both securities.
Access to the markets through approachable and convenient investing platforms has empowered professional and beginner investors to easily buy and sell ETFs, shares and other securities. In fact, many investing platforms have adopted mobile-friendly applications that strengthen the compatibility of investing with modern day-to-day life.
A wider range of options
In the years since exchange-traded funds first became available, investor demand for these instruments has grown. In fact, further calls for variety have inspired different types of exchange-traded funds to be created that involve more nuanced and particular segments of the stock market.
There’s a growing number of investable options alongside traditional index ETFs that provide exposure to specific themes or trends in the stock market. Investors can now invest directly in government bond ETFs, hard-to-access assets like crude oil with synthetic ETFs or even the tracking of foreign currencies with commodity ETFs, to name a few.
With more specificity, comes a higher risk of volatility, so it’s always recommended that research is conducted before any major investment.
Actively managed funds
While many traditional ETFs typically aim to match or track an underlying index passively, there is a growing trend of funds that hire a fund manager or portfolio manager to invest money in order to beat an underlying index’s performance.
The increase in actively managed ETFs – particularly in the realm of thematic and sector ETFs – has allowed more engaged observers to invest in niche and sector-specific ETFs that align with their passions, from artificial intelligence to corn prices.
Due to their ever-changing nature and potentially niche investment focus, active ETFs could incur higher management fees and be more susceptible to volatility.
How to start investing in ETFs
If you’re ready to start investing in ETFs you’ll need to open a brokerage account with an online broker or investment platform which involves the following:
- Find an investing platform
- Sign up for an account with your chosen platform
- Research and determine the ETF that complements your strategy and goals
- Fund your investing account and place an order on the exchange-traded fund you chose
- Track the performance of your new investment
1. Find an investing platform
Your first step is choosing a reliable investing platform with competitive fees that offers the securities that appeal to you.
Additionally, a great investment platform should complement your goals and experience levels. So ensure you check your prospective platform in advance if you’re looking for educational content, research tools to compare ETFs or even convenient features like instant funding or analyst ratings.
If you’re ready to start buying ETFs, you can open a Stake investing account in a few minutes and access over 1,000 Wall St and ASX-listed ETFs.
2. Signing up
Once you have decided on the platform, you’ll have to sign up for an account before you can start investing in ETFs. Every platform and provider will have slightly different onboarding processes and requirements.
For example, Stake has a 100% online sign-up process, all you need is some I.D. and basic personal details on hand. Of course, you may be asked for more information in special circumstances – you can get a step-by-step guide to the sign up process here.
3. Research ETF prices and underlying assets
Once your account is open, you can begin browsing the stock market and analyse the available options. It’s extremely important you conduct your own research before trading.
When researching an exchange-traded fund, it’s usually wise to consider a few key fundamentals. This includes (but is not limited to) questioning whether the ETF is passively or actively managed, what the fees or expense ratios are for the security and the past performance of the ETF.
Your investment strategy and risk tolerance should always be front of mind when researching options. For example, if you’re the kind of investor that is seeking consistent returns from your ETF portfolio you may ask yourself ‘Should I be investing in more passive ETFs or seek out active ETFs that regularly pay dividends but with higher fees?’
Always take your own personal finances into consideration when researching and crafting your investment strategy. If you’re looking for more guidance in your investments, you could seek out a financial planner or consider mutual funds that take a lot of the responsibility of managing a long-term strategy.
4. Fund your account and place an order
After determining the exchange-traded fund you want to buy, it’s time to fund your account and place an order. This step can differ depending on the platform you choose and the payment methods your chosen platform supports.
For example, the Stake payment methods include funding directly into your AUS or Wall St account via bank transfer, credit/debit cards, Google Pay or Apple Pay.
Once you’ve deposited your funds, you’ll be able to look up your chosen security, enter the number of ETF units you wish to buy, and place an order. The types of orders available will depend on your chosen investment platform. If you were investing on Stake, you have the option to place a market, limit or stop order. You can learn more about different types of orders here.
5. Track the performance of your new investment
Once you own your exchange-traded fund, you should keep an eye on its performance. Check your portfolio regularly to ensure your investment is aligning with your financial goals.
Depending on the stock investing app you’re using, you should be able to see the ETF's trade price, volume, dividend announcements, related news and other relevant information.
Just remember, markets can be volatile in the short term and impact some of the fund’s underlying investments which may in turn impact the ETF share price. It’s important you monitor your portfolio closely and seek out professional financial advice if you’re having issues or worries about your investments.
How much money do you need to invest in ETFs?
When executing trades, there may be a minimum investment value implemented by the platform or stock exchange.
Minimum Marketable Parcel (MMP)
The Australian Securities Exchange requires a minimum investment of A$500 (excluding brokerage) when purchasing shares in any ASX-listed security for the first time. This is known as the ‘Minimum Marketable Parcel’ (MMP) of shares.
The MMP applies to all CHESS-sponsored trades.
For Wall St markets, fractional shares allow you to buy a piece of a share. They’re an affordable way to diversify a portfolio and can be a useful tool if you’re considering a certain ETF but don’t want to spend the full cost of the share.
Not all investing platforms provide this option but on Stake Wall St you can buy fractional shares of ETFs from as little as US$10.
How much do ETFs cost?
The cost of buying ETFs can vary from platform to platform, the provider of the security and the type of ETF you’re purchasing.
You’ll typically pay brokerage fees whenever you make a trade on an investment platform. This fee is charged by the investing platform and can vary from a flat fee to a percentage of the trade value.
Stake charges a simple flat fee of $3 for trades up to $30k and 0.01% on trades above $30k (USD for Stake Wall St and AUD for Stake AUS).
Check out this guide on brokerage fees in Australia and compare against other platforms.
Management expense ratio
Expense ratios refer to the management fees typically associated with mutual funds and ETFs. It refers to the fee charged by an ETF provider and is expressed as a percentage and reflected in the ETF unit price. The expense ratio is deducted from the gross profits of the fund (before being imbursed to investors) and is paid to the fund manager.
An active mutual fund will typically have a higher expense ratio due to the additional labour involved. Ensure you check the expense ratio prior to investing in a security, particularly if you’re doing it for the first time.
Just like individual securities, there can be tax implications when buying and selling ETFs. This can include tax on any capital gains made from the selling of an ETF position or stamp duty levied by select state governments when purchasing an ETF.
If owned ETFs pay dividends, there could be tax implications also. You may be subject to additional taxes if you’re investing in international share markets.
If you want a clearer picture of your personal tax obligations, it’s recommended you speak to your accountant or a taxation professional.
Some platforms may charge additional fees including inactivity fees, account maintenance fees, premium deposit/withdrawal fees and more.
Your chosen platform should aim to keep fees simple, consistent and transparent. When selecting the investing platform you wish to buy and sell ETF units on, seek out their pricing page and determine whether this is the platform for you.
You can see Stake’s pricing page here.
What ETFs are good for beginners?
The right ETF for beginners will depend on a number of factors including the currency risk tolerance, financial situation and the overall goal for the investor.
If you are just starting your investing journey it’s important to approach it with a prepared strategy and an educated understanding of the markets. Take the time to learn the fundamentals of investing and ETF basics through online resources, books and trusted professionals.
If you’re just starting out, it’s always best to start investing in small amounts in ETFs with diverse exposure to well-established companies. Many opt for passive index funds or ETFs that have widespread market exposure and low cost management fees.
Check out our guide if you’re looking to learn more about passive investing.
What are some ETF investment strategies?
ETFs can play a crucial role in a variety of investment strategies, from basic to advanced. Remember you’ll likely develop your own strategy as you gain more experience.
Here are some popular and well-known strategies that incorporate ETFs.
Dollar cost averaging
This strategy involves making multiple smaller purchases of an ETF at regular intervals instead of one larger lump sum investment. The notion for this strategy is managing price risk by spreading investments over a longer period of time whereby market price fluctuations could net a higher long-term yield of shares.
Tactical asset allocation
ETFs can be used by investors to effectively target or tilt their portfolio exposure away, or toward asset classes, sectors or market trends they expect to outperform or underperform.
An example of this would be an investor with exposure to an index fund tracking the broad Australian market selling a portion of their shares and buying units of a particular bond ETF if they anticipate that corporate bonds are about to outperform the wider market.
Strategic asset allocation
A fundamental long-term strategy would be to simply use ETFs as a means of strategic and effective diversification. By their nature, ETFs are generally low cost (compared to a mutual fund or buying underlying individual shares), offer exposure to multiple asset classes and are relatively simple to purchase.
Core and Satellite
Core and satellite strategies can be akin to passive and active investment channels respectively. The notion behind this strategy is splitting an investment portfolio into two key categorical components.
Core: The foundation for the strategy with investments aiming to yield returns via low-cost securities such as broad index funds over a long period of time.
Satellite: This component would aim to outperform the ‘core’ holdings and generate an excess market return as a result. This may involve the utilising of individual stocks, mutual funds or ETFs that track a more specific index.
As ETFs are high-liquid investing tools, they can be used by more experienced investors as a short-term cash float if they need to maintain a particular cash balance in their account or to minimise portfolio ‘cash drag’.
Sector or thematic ETF investing is another strategy employed by more active and experienced investors. By investing in specific sector ETFs, investors can try to outperform the broader market without having to research individual stocks in that sector or purchase each underlying asset individually.
What are the risks of exchange-traded funds?
There are risks associated with any investment. Here are some key risks to watch out for when investing in ETFs:
Volatile markets: The price of shares and ETFs on a stock exchange can fluctuate due to sudden conditional changes in the market, fund or sector-related news or significant economic events. These conditions can lead to financial losses and decreased portfolio value, it’s important to consider your financial situation before investing.
Sector breakdown: Sector or thematic ETF investors should be aware of the increased risk they undertake when investing in a more narrowly focused instrument. While the potential for growth is present, there are also heightened risks of wide price fluctuation in the event of a sector breakdown or slow-down period.
Economic downturn: Changes in governmental policy, interest rates, economic conditions or even global events can impact the net asset value and price of ETFs. For instance, an interest rate hike could restrict demand for shares and ETFs which can lead to financial losses, similarly a recession may impede the economy’s growth trajectory which invariably impacts the markets.
Liquidity risk: Similar to shares, lesser known or low liquidity ETFs with fewer interested investors and Funds Under Management (FUM) can raise the risk of financial losses if you wish to sell your position.
Are ETFs better than a managed fund?
The right investment product can only be determined by the individual, taking into account personal financial circumstances and investment goals. Understanding the difference between a managed fund and an ETF could help you identify the one that is right for you.
Mutual funds typically carry a higher minimum investment as well as a higher expense ratio due to their actively-managed nature. Fund managers would traditionally buy and sell shares and instruments residing in the fund in an attempt to ‘beat’ the market and increase profits for investors.
ETFs have traditionally been passive in nature, often tracking/matching a market index return. However, in recent years there has been a noticeable increase in the number of more actively managed ETFs.
Also, since ETFs can be traded on stock markets such as the Australian Securities Exchange, the barrier for entry is often comparatively lower than managed funds.
Liquidity in the market could impact your decision. As ETFs are traded on a share market, they’re susceptible to low liquidity which can result in large bid/ask spreads and a disappointing trade result. A mutual fund is always priced at net asset value, which could be more financially suitable if you’re looking at a comparable ETF that has low liquidity.
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ETFs can provide investors with a diversified portfolio at a lower cost to purchasing each underlying asset individually.
If you’re considering buying ETFs, it’s recommended you open an investing account with a reputable and suitable platform. It’s important to educate yourself on the markets and understand the inherent risk that goes with investing.
This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.
Megan is a markets analyst at Stake, with 7 years of experience in the world of investing and a Master’s degree in Business and Economics from The University of Sydney Business School. Megan has extensive knowledge of the UK markets, working as an analyst at ARCH Emerging Markets - a UK investment advisory platform focused on private equity. Previously she also worked as an analyst at Australian robo advisor Stockspot, where she researched ASX listed equities and helped construct the company's portfolios.