Investing in Exchange-Traded Funds (ETFs) has gained popularity in recent years as a way to gain exposure to a diversified portfolio of assets with the convenience of trading on the stock exchange. In Australia, the ETF market has experienced significant growth, offering a wide range of investment opportunities to investors keen on beating inflation and growing their wealth over a period of time. In this article, we will explore the best Australian ETFs and discuss the factors to consider when choosing from the best ETFs on ASX that will best fit your investment objectives.
What are ETFs?
ETFs are designed to track the performance of a specific index, sector, or asset class. They are structured as open-ended investment funds and offer investors the ability to buy or sell them throughout the trading day at market prices. This liquidity and flexibility ultimately make ETFs an attractive investment option for both beginner and experienced investors.
Why Invest in ETFs?
While there is a whole plethora of options to choose from when deciding where to park your hard-earned money, here are some reasons why you should consider investing in ETFs:
Diversification
For starters, ETFs provide a degree of diversification as their holdings typically include a variety of different securities. Instead of having a portfolio focused on a handful of assets, ETF diversification across different sectors and industries helps to mitigate risk.
Lower Costs
Secondly, ETFs are generally considered to be low-cost investments compared to traditional mutual funds. This is largely because of the more affordable management fees and expense ratios.
Liquidity
Finally, as Australian ETFs traded throughout the day on the Australian Securities Exchange (ASX), they give investors the ability to buy or sell their investments instantly. This is in contrast to traditional mutual funds which only allow trading at the end of the trading day. As a result, ETFs can be a great option for those who want to take advantage of short-term market opportunities quickly and conveniently.
Factors to Consider When Choosing the Best Australian ETFs
When selecting the best Australian ETFs for your investment portfolio, here are several factors to consider:
Sector
First and foremost, investors must determine the sector that might want exposure to. Australian ETFs cover a wide range of asset classes, including Australian equities, international equities, fixed income, commodities and more.
Management Fees
Management fees for ETFs refer to additional expenses that range from operational costs to marketing expenses. ETF investors do not pay management fees directly to the ETF manager. Rather, fees and costs are accrued daily and deducted on a monthly basis from the fund assets. This is then reflected in the daily price of the ETF.
Index Tracking Methodology
It's important to understand how the ETF tracks its underlying index. Some ETFs use a full replication strategy, where they aim to hold all the securities in the index. Others use a sampling strategy holding a representative subset of the index's securities.
Trading Volume & Liquidity
If you're intending to day trade a specific ETF, it's important to first consider the trading volume of the ETF. Higher trading volume generally indicates better liquidity and narrower bid-ask spreads, meaning better fills when you're actively trading.
Risks & Considerations of Investing in Australian ETFs
While ETFs on ASX may offer many benefits, it's important to be aware of the risks and considerations involved.
Market Risk
ETFs are subject to market risk, which means that the value of your investment can fluctuate based on market conditions. This is especially so for sector-specific ETFs that have holdings focusing on one specific sector.
Liquidity Risk
Although most Australian ETFs are liquid, some niche or less-traded ETFs may have lower liquidity. This can result in wider bid-ask spreads and potential difficulties in buying or selling shares at favourable prices.
Tracking Error
ETFs aim to replicate the performance of their underlying index, but they may not perfectly match the index due to tracking errors. This can be caused by factors such as fees, trading costs, and sampling methodology.
Currency Risk
Foreign currency exchange rates can also impact the returns of ETFs if they hold international investments. If the Australian dollar strengthens, your returns from overseas investments may be reduced.
Top Australian ETFs Sorted By Popularity
From ETFs targeting the Australian Securities Exchange to ETFs offering international exposure, here are some of the best Australian ETFs to consider:
1. Vanguard Australian Shares Index ETF (ASX: VAS)
As the largest index ETF in Australia that offers exposure to the top 300 companies on the ASX, it's natural that many investors immediately think of Vanguard Australian Shares Index ETF as the best Australian ETF for investors looking for broad market exposure. With its highly diversified exposure to the Australian market and affordable management fee of 0.1% per annum, VAS offers investors the best odds of tracking the performance of the S&P/ASX 300.
2. Vanguard MSCI Index International Shares ETF (ASX: VGS)
The Vanguard MSCI Index International Shares ETF offers access to international markets, with 70.4% of the fund being allocated to the US and 6.4% allocated to Japan. This effectively provides diversification outside the Australian stock market so your portfolio gains more international exposure. It tracks the MSCI World ex-Australia Index, which gives investors exposure to more than 1,600 stocks from 23 developed markets. VGS is also highly cost-effective, with an expense ratio of 0.18%.
3. iShares S&P 500 ETF (ASX: IVV)
Keen to take up Warren Buffett's advice of investing in the Standard & Poor's 500 Index? The iShares S&P 500 ETF is a low-cost and efficient way to invest in the S&P 500 as it consists of all 500 stocks that make up the index. This provides investors with broad exposure to large U.S. companies from diverse industries including technology, health care, financials, and consumer staples. By tracking the performance of this well-known index, investors get instant diversification at a fraction of the cost of purchasing individual stocks. In addition, the ETF is fully transparent and liquid which makes it easy for investors to add or remove their investments while allowing them to benefit from cost savings due to its low expense ratio.
4. BetaShares Nasdaq 100 ETF (ASX: NDQ)
High-growth investors will be glad to know that they can invest in the BetaShares Nasdaq 100 ETF. NDQ provides investors with a range of benefits that make it an attractive option for those who are looking to increase their exposure to the US stock market. As the ETF tracks the performance of the well-known Nasdaq-100 index, investors can benefit from low operating costs due to its low expense ratio and instant diversification when buying into this ETF while enjoying the stellar performance of tech stocks like Microsoft and Apple. The ETF is also highly liquid and transparent with its tech-focused holdings, making it easy for investors to add or remove their investments.
5. BetaShares Australia 200 ETF (ASX: A200)
The BetaShares Australia 200 ETF provides Australian investors with an easy way to gain exposure to the largest 200 companies listed on the ASX. As its benchmark, it tracks the performance of the S&P/ASX 200 index which is composed of some of Australia's leading blue-chip stocks like CSL, BHP and Woolworths. Investors can benefit from investing in this ETF as it offers instant diversification and low fees due to its low operating expense ratio. As one of Australia's most traded ETFs, A200 also provides high liquidity for investors who want to add or remove their investments easily.
6. Vanguard Diversified High Growth Index ETF (ASX: VDHG)
If you're an investor with a longer time horizon and are willing to take on more risk, then the Vanguard Diversified High Growth Index ETF will be a perfect option for you. As another popular choice among Australian investors, VDHG providesan easy way to invest in a diversified portfolio of growth stocks from the ASX. This reduces the risk associated with investing in any one single security. The fund follows the S&P/ASX 300 High Growth 50 index which includes stocks from across various sectors and industries like finance, technology and healthcare. This ETF also offers investors a low expense ratio and high liquidity, making it an attractive option for those looking to gain exposure to high-growth companies on the ASX.
7. Vanguard Australian Shares High Yield ETF (ASX: VHY)
The Vanguard Australian Shares High Yield ETF is another ETF which gives investors access to a diversified portfolio of stocks with a focus on companies that have a higher-than-average dividend yield. It tracks the S&P/ASX Dividend Opportunities 50 Accumulation index which includes companies from across many sectors and industries including finance, energy, telecoms and industrials. This fund also offers investors an attractive expense ratio and good liquidity. For those looking for income returns as well as some growth, VHY provides them with exposure to high-yielding stocks from across Australia’s financial markets.
8. BetaShares Diversified All Growth ETF (ASX: DHHF)
The BetaShares Diversified All Growth ETF is a diversified exchange-traded fund which delivers exposure to the performance of Australia’s equity market. This ETF tracks the S&P/ASX All Growth 50 Accumulation index and consists of large, mid and small capitalisation stocks from across many sectors including health care, consumer staples, IT and financials. DHHF has a low management fee and is one of the more liquid ETFs on the ASX. It also allows investors to access a range of growth stocks from across Australian markets in one portfolio.
9. iShares Core S&P/ASX 200 (ASX: IOZ)
Prefer only having exposure to Australia's biggest and best blue-chip companies? The iShares Core S&P/ASX 200 ETF is a low-cost, index-tracking fund that provides access to the largest and most liquid stocks on the Australian Securities Exchange. It follows the S&P/ASX 200 Index and includes stocks from sectors such as financials, materials, energy, consumer staples, and healthcare. Investing through this ETF gives investors exposure to Australia’s big-name companies with its diversified portfolio of quality stocks. IOZ also offers investors an efficient and cost-effective way to invest in the Australian market since it has a very low expense ratio.
10. Vanguard US Total Market Shares Index ETF (ASX: VTS)
To wrap up our list of the best Australian ETFs that you can trade with us, the Vanguard US Total Market Shares Index ETF is a low-cost, index-tracking fund that provides exposure to the entire US stock market. By investing in VTS, investors gain exposure to more than 3500 large and mid-cap stocks from all eleven sectors of the US economy. From high beta tech stocks to the defensive utility sector, there’sa whole range of stocks in this ETF to maximise diversification. Additionally, this ETF has a diversified portfolio of quality stocks with low expense ratios and is an efficient way to invest in the US market.
The Bottom Line
All in all, ETFs on the ASX offer investors a convenient and cost-effective way to gain exposure to a diversified portfolio of assets. By considering factors such as sector focuses, management fees, and performance track record, investors can choose the best Australian ETFs that align with their investment objectives. Armed with this information and are keen to get started with growing your capital? Check out CMC Invest and begin your investing journey with us today.
