What is an ETF?

Exchange Traded Funds (ETFs) offer diversified and low-cost access to the world’s investment markets. ETFs are designed to mirror the performance of specified indexes, less the management fees.

The risk profile of ETFs is derived from its underlying holdings, and since you get a diversified selection of stocks, this can potentially help reduce risk compared to individual stocks.

Key features

ETFs have the following key features:

  • They can track an underlying index, such as the S&P/ASX 200 or the NASDAQ 100.
  • They are passively managed (on ‘’autopilot’’).
  • Investment management fees are typically low.
  • They’re traded and quoted on an exchange, such as the ASX.
  • They can be bought or sold via nabtrade, and in Australia, are CHESS settled.
  • They will pay distributions – often quarterly.
  • Their performance should mirror the underlying index, less the management fee. Nothing more, nothing less.
  • The issuers of ETFs engage ‘market makers’ to provide liquidity support on the ASX.

Types of ETFs

In recent years, the ETF market in Australia has expanded considerably and there is now a wide variety of ETFs available, covering most asset classes and asset sectors. You can access ETFs that cover:

  • Australian shares
  • Australian share market sectors (for example, financial or resource stocks)
  • International shares (by region, country, sector or market)
  • Fixed interest securities (government bonds, corporate bonds)
  • Cash
  • Credit securities (including hybrids)
  • Gold and silver
  • Property
  • Currency (US dollar, Euro etc)
  • Commodities (oil, agriculture)

Benefits of investing in ETFs

Simple investing

ETFs can be bought and sold in the same way as ASX listed equities via your nabtrade Account. Domestic ETFs are issued with an ASX code to help make them easily identifiable.

Access

Access and exposure to international emerging markets, clean energy, robotics, digitisation and healthcare can be easily achieved through the purchase of an ETF.

Visibility

Unlike some Managed Funds where unit prices are struck at varying intervals and information is hard to find, ETFs are ASX listed so will always have a clear visibility of prices, the constituents of the fund and management information.

Diversification

ETFs can be a cost-effective way to diversify your portfolio. An ETF allows you to spread your investment across similar asset classes, indexes companies or brands within the one holding.

Cost savings

Rather than buying multiple securities and incurring multiple brokerage charges, investing in an ETF allows you to gain exposure to multiple securities in an open-ended fund with the one trade and the one brokerage charge.

Buying and selling ETFs

Like ordinary shares, ETFs can be bought and sold on the ASX, making them a much more liquid investment than a managed fund.

Risks of investing in ETFs

Volatility

While ETFs offer the potential for relatively high returns, prices can fluctuate due to market forces. 

Tracking error

Some ETFs have complex structures and may not replicate the performance of the underlying index or asset.

Liquidity risk

There may be instances where you’re unable to sell your ETFs due to very low trading volumes.

Podcast: 39 min listen
First published June 2019

Things you need to know before you buy or sell ETFs

ETFs now account for a substantial proportion of daily turnover on the ASX and are often the first investment for investors looking for exposure to the sharemarket or a new sector.

Their promise of low fees and easy access appeal to a wide variety of investors – but as with any investment product, there are complexities and strategies that can improve, or reduce, their value in your portfolio.

ETF expert and CEO of ETF Securities Australia, Kris Walesby, explains his views on:

  • Why you should never buy an ETF at the open or the close of the market
  • How to use ETFs to ride a recovery
  • Hedging strategies that could protect your portfolio, and
  • How to minimise your costs and reduce volatility when building a portfolio.

Learn more about ETFs

Explore ETFs and how they compare to other investments.
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How do ETFs compare

Find out how ETFs compare to shares and managed funds.

Tracking indices through ETFs

Learn more about index investing and your portfolio.

ETF FAQs

All your ETF questions answered.