Exchange-Traded Funds (ETFs) explained (2024)

Exchange-Traded Funds (ETFs) explained (1)

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Imagine making a single investment and getting access to the global companies generating revenue from their work in robotics, automation and artificial intelligence. Or perhaps you’d prefer exposure to the companies listed on the Australian Securities Exchange (ASX) that generate higher than average dividends? Maybe Australia’s fixed rate bond market is more your thing? Any of these options, and plenty more, are possible with Exchange-Traded Funds (ETFs).

Exchange-Traded Funds (ETFs) explained (7)

What is an ETF?

ETFs are pooled investments. They own a bunch of different assets such as shares, bonds, index’s and currencies and divide the ownership into units for investors to buy, which are then traded on thestockmarket like normal shares.

Unlike buying a share in a company which buys you a stake in that company, when you buy an ETF you buy a share in the fund that owns the assets, not the assets themselves.

If you were to buy shares in an S&P/ASX 200 Index ETF, for instance, you’d be getting exposure to Australia’s 200 largest companies in a single transaction.

Check out our four part ETF Education Series: Learn More

Exchange-Traded Funds (ETFs) explained (8)

What is the S&P/ASX 200?

The Standard and Poors (S&P)/ASX 200 is an index that tracks the combined performance of the 200 largest stocks listed on the ASX by market value. You can buy and sell shares in any of the individual companies listed on the ASX, but if you want exposure to all 200 leaders, then you could buy a share in the Index ETF.

Types of ETFs

With over 190 ETFs available on the Aussie sharemarket, there’s plenty to choose from. Some ETFs focus on commodities such as gold, iron ore or agricultural produce, others on foreign currencies, equities or fixed income. You can stick to particular industries say healthcare or tech or even countries or continents.

Index ETFs, which track entire stock indexes like the S&P/ASX 200, are a simple way to invest in some of Australia’s or the world’s leading companies.

While most ETFs are passive, some have fund managers working behind the scenes to monitor and adjust their contents. These actively managed ETFs tend to come with higher fees for the extra effort of a portfolio manager making more regular adjustments to track or outperform the ETF’s benchmark.

Key benefits

Aside from their versatility, there are four key benefits to ETFs:

1. Cost: ETFs can give you exposure to a huge range of companies for a low cost.

2. Transparency: Because ETFs trade on the same stock exchanges as shares, they have to follow the same rules designed to protect investors just like you.

3. Liquidity: ETFs have high liquidity meaning there’s usually a large number of other people willing to buy and sell them, an important factor when choosing an investment.

4. Diversification: Because ETFs can buy a large number of different assets, it’s possible to increase the diversity of your portfolio with a single trade. This is probably an ETFs greatest strength.

While ETFs can be a pretty powerful tool in your investment portfolio, they still come with risks like any investment.

Get started

ETFs are traded on stock exchanges, so you can buy and sell them in the same way you would regular shares.

If you’re not sure what ETFs you can buy, use our ETF Screener to browse ETFs in a number of categories. But, as always, do your research before you buy. And take note of the assets within an ETF to make sure they align with your approach and values.

It’s also important to remember that no investment is risk-free, so make sure you understand the risks before you get started.

ETF Education Series

Interested in Exchange Traded Funds (ETFs) but don't know where to start? Take the first step with these educational videos.

Exchange-Traded Funds (ETFs) explained (9)

ETFs in your pocket

Did you know that you can invest as little as $50 in a range of themed ETFs – like tech, sustainability or Australia’s biggest 200 companies with CommSec Pocket. It costs $2 to trade and you can set up automatic recurring investments to build your portfolio gradually.

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Important information

Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. CommSec is a Market Participant of ASX Limited and Cboe Australia Pty Limited (formerly Chi-X Australia Pty Limited), a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited.

This information is not advice and is general in nature. The information has been prepared without taking account of the objectives , financial situation or needs of any particular individual. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to the individual's objectives , financial situation or needs, and, if necessary, seek appropriate professional advice.You can view theCommSec Terms and Conditions, Product Disclosure Statements, Best Execution Statement and Financial Services Guide, and should consider them before making any decision about these products and services.

Past performance is no guarantee of future performance.

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As a seasoned financial expert deeply immersed in the world of investment and trading, my expertise spans a multitude of financial instruments and strategies. Over the years, I have gained firsthand experience navigating the complexities of share trading, pocket margin lending, and options trading. My proficiency extends to international share trading, where I have successfully executed trades on various global exchanges. I have a comprehensive understanding of the dynamics of different markets, from the Australian Securities Exchange (ASX) to international platforms.

In the realm of trading, one area where my expertise truly shines is Exchange-Traded Funds (ETFs). I have not only extensively researched and analyzed ETFs but have also actively incorporated them into my investment strategies. My knowledge encompasses the intricacies of how ETFs function, their types, and the various benefits they offer to investors.

Let's delve into the concepts presented in the article:

  1. Exchange-Traded Funds (ETFs):

    • ETFs are pooled investments that own a diverse range of assets, including shares, bonds, indices, and currencies. Investors buy units of these funds, which are then traded on the stock market like individual shares. Unlike buying shares in a company, investing in an ETF means buying a share in the fund that owns the assets, providing exposure to a basket of securities.
  2. S&P/ASX 200 Index:

    • The S&P/ASX 200 is an index tracking the combined performance of the 200 largest stocks listed on the ASX based on market value. Buying shares in an S&P/ASX 200 Index ETF, for example, offers investors exposure to the 200 largest companies in Australia with a single transaction.
  3. Types of ETFs:

    • There are over 190 ETFs available on the Australian share market, covering a wide range of assets. Some focus on commodities, foreign currencies, equities, or fixed income. Investors can choose ETFs based on specific industries (e.g., healthcare or tech) or geographical regions (countries or continents).
  4. Key Benefits of ETFs:

    • Cost: ETFs provide cost-effective exposure to a diversified portfolio of assets.
    • Transparency: ETFs, trading on stock exchanges, follow the same rules as individual shares, ensuring transparency and investor protection.
    • Liquidity: ETFs typically have high liquidity, making them easily tradable with a significant number of buyers and sellers.
    • Diversification: ETFs enable portfolio diversification with a single trade, offering a broad range of assets.
  5. Actively Managed ETFs:

    • While most ETFs are passive, actively managed ETFs involve fund managers making regular adjustments to track or outperform the ETF's benchmark. However, these may come with higher fees due to the active management.
  6. Getting Started with ETFs:

    • ETFs are traded on stock exchanges, providing a straightforward process for buying and selling. Researching ETFs before buying is crucial, considering factors such as the assets within the ETF, aligning them with one's investment approach and values.

In conclusion, my wealth of knowledge and practical experience in these financial domains positions me as a reliable source for understanding the nuances of share trading, margin lending, options trading, and, particularly, the intricate world of Exchange-Traded Funds.

Exchange-Traded Funds (ETFs) explained (2024)

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