ETFs: the popular kid (part 1/2)

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ETFs: the popular kid (part 1/2)

Thanks to the ease of use and relative affordability of Exchange Traded Funds (ETFs), their popularity has exploded in recent times. Over the past year, the Australian ETF market grew by a staggering 74.9% (compared to the slightly further-ahead US market, which grew 23.7%).

Even if you’re not exactly sure of how ETFs work, you’ve almost certainly heard of examples of them.

Vanguard, the largest player in the Australian market, provides several ETF options including the Australian Shares Index ETF, which tracks the S&P/ASX 300 (ASX:VAS) – the top 300 companies in Australia.

ETFs can also track specific industry sectors like tech, biotech, healthcare or even gaming. BetaShares offers a range of these, known as thematic ETFs. [link to article]

How do ETFs work?

ETFs are an easy way to invest in sectors you’re interested in, without hedging all of your bets on one company or startup.

You buy and sell into an ETF the same way you’d buy a share on the stock market. The difference is that you’re buying a ‘basket’ of stocks across one asset class, rather than a singular stock. These asset classes could be property, commodities (oil, gold, coffee, etc), crypto stocks, bonds, or sectors like tech, healthcare, or cannabis.

Broadly speaking, there are two different styles of ETF investing.

One is oriented on a passive investment strategy, where the fund tracks the market index. This is the most common form in Australia and is offered by the big players: Vanguard and BetaShares.

One is based on an active investment strategy, where a fund manager like Magellan or eInvest selects the stocks they think will perform and packages them into an ETF.

What are the differences between ETFs and mutual funds?

ETFs are often compared to mutual funds, and they do function in a similar way. But there are a few key differences between the two to understand.

  • You can invest in ETFs throughout the trading day, whereas mutual funds are priced at the end of the trading day.
  • ETFs generally have lower fees than mutual funds.
  • ETFs may be more tax efficient. Mutual funds on the whole involve more buying and selling, which can lead to owing more capital gains tax. With ETFs, you’d only be taxed upon selling your investment.
  • Mutual fund minimum initial investments aren't based on the fund's share price, but on a flat dollar amount.

ETFs and diversification

ETFs are inherently diverse. Your investment is spread across several stocks within one or multiple asset classes. This means passive investing in an ETF is generally likely to be lower-risk than the ‘all eggs in one basket’ approach of buying single stocks and shares.

These days, you can even buy an ‘EFT of ETFs’ for increased diversification. Vanguard offers a range of 4 broad ETFs built for different risk profiles (conservative, balanced, growth and high growth) that are packaged around its existing ETF offerings.

But that’s not to say your diversification efforts should stop there. ETFs may form a long term, lower-risk segment of your portfolio. But this can be balanced with some higher risk investments like individual stocks, crowd-sourced funding (CSF) offers, cryptocurrency or even music royalties.

Popular ETF providers in Australia include:

James Brannan

Director of Operations at STAX

Sam Henderson

Director of Marketing at STAX

Natalia Forato

Social Media Manager at STAX

All views, investment or financial opinions expressed are those of the author and do not necessarily reflect the official policy or position of STAX. The information contained in this post is not investment advice or a recommendation to buy or sell any specific security.
Understand the Risks

Under crowdfunding legislation in Australia, STAX is what’s known as a ‘gate keeper’. That means we’re obliged to check certain company details on your behalf. Read more about how we select companies here.

Like anything in life though, investing on STAX comes with risks. While we carefully screen every company, we can’t actually guarantee their success. Nor do we give any investment advice or take responsibility for losses. We’ve covered the general risks here.

Information is currency.
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