Index funds listed on the ASX are called Exchange Traded Funds and allow investors a wealth of opportunities to invest across multiple markets, asset classes and at various risk profiles.
The Advantages of ETFs
Low Cost
Research shows that asset management fees can make a large difference in investment returns over the long term. ASX listed ETFs or index funds replicate the returns of the particular equity market or bond index it tracks and provides a passive option in investing.
Index funds are known as passive funds because their sole goal is to track the benchmark index’s performance rather than take an active position and beat the market.
The passive nature of these investments allows investors to buy the “whole market”. The funds have minimal trading activity as it is rebalanced once or twice a year, which means minimal trading cost and almost no research costs as it does not participate in stock selection.
Immediate Liquidity
By its nature being listed allows investors in exchange traded funds to easily enter into and sell out of their investments when markets are open for trading.
The intraday liquidity is a clean and fast process compared to unlisted funds typical unlisted funds daily redemption process. Even then it will take more than two days for the process to settle and investor access to the cash.
One way of looking at the downside of having the option of intraday liquidity is that investors can take the liquidity for granted in the good times; it is always there, but during periods of market volatility there could be a discrepancy between the asset value and the market value of the ETF units. This can occur during periods of extreme market disruption, as we saw during the turmoil at the start of Coivd.
ASX ETF List
The growth in exchange traded funds on the ASX provides wealth options but it can be hard for investors to find the Australian ETF list all in one place.
We collected a searchable database of the funds noting its asset class or sector it belongs to and where it sits on the risk spectrum.
We have grouped the funds by asset classes and highlighted the main differences between the largest index funds in each category with additional information of the main fund groups to provide context to what the fund tries to achieve.
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Australia Equity ETFs
Australian Share Market Index Funds
Share market index funds track the main Australian indices such as the ASX 20, ASX 50 or ASX 200 indexes. The most popular Australian index fund in this category is the SPDR S&P/ASX 200 (STW) and Vanguard Australian Shares Index ETF (VAS).
SPDR S&P/ASX 200 ETF (STW) is one of the largest ETF listed on the ASX and replicates the ASX 200 Index.
Australia Sector Funds
Sector ETFs track the performance of a particular segment or sector of the market. Sector specific funds allow investors to gain exposure to particular areas of the market where they think it is relatively more attractive based on current market conditions or that particular sector in their view will outperform the wider market.
The ASX is dominated by the financials and mining sectors and some of the popular options here are funds that exclude these sectors.
One of the most popular and rising sector funds in recent is the healthcare ETF and as the name suggests, invests in the companies only belong in the healthcare sector.
SPDR S&P/ASX 200 Financials EX A-REIT ETF (OZF) is a sector fund that invests in just financial companies. Another sector fund example is SPDR S&P/ASX 200 Listed Property ETF (SLF) or SPDR S&P/ASX 200 Resources ETF (OZR), which invests in AREITs or resource companies respectively.
The common thread running through most sector only funds is the companies selected from the ASX 200 or 300 index.
Small Cap ETF / Mid Cap ETF
Most market indexes are market cap weighted and result in a natural bias towards large cap stocks. In the ASX 200 more than 180 companies have a market capitalization of more than $1 billion.
You would say why invest in small or mid caps? The key attraction is that small and medium size companies usually have higher growth potential due to their size and market penetration. Small and mid caps provide a greater opportunity for value creation and runway for growth.
Australia Smart Beta ETFs / Factor ETFs
The latest trend in ETF investing is factor investing or smart beta ETFs.
What is factor investing?
This investing approach breaks down investments into specific characteristics or factors that explain their risk or performance. For example a stock can be classified as value or growth stock based on the book value ratio or earnings growth rate. These criteria are used to create a portfolio of similar characteristics to replicate the factors’ performance. Investors can then invests in the factor portfolio to gain specific exposure to that particular factor.
The main goal of factor investing is breaking down a selection of factors that will drive outsized outperformance over the long run and only focus on those particular factors.
The list of ETFs shows several factor ETFs on the ASX follows various stylistic or macroeconomic factors.
List of Major Factors
- Value
- Leverage (see below on 2x Leveraged ETFs)
- Quality
- Dividend Yield (Dividend ETFs)
- Size – equal size or market cap weighted funds
- Passive
- Growth
- Momentum
The latest factor seeing the largest inflow is the ethical ETF which focuses on investing in companies based on its ESG (environmental, social and governance) rating. The idea here is those companies that do the right thing will outperform the broader market.
Investors can then take advantage of the historical performance and benefit from the trend by buying into the fund. However it is important to understand that historical performance is not an indication of future returns.
The risk for factor investing is it looks like there is an element of data mining where products are created based on their historical performance but what worked in the past does not mean it will continue to work in the future.
Another example is dividend ETFs which is really a high income share portfolio. Dividend and bonds ETFs are both income focused strategies that aim to provide a consistent income stream for its investors. The important difference is that dividend ETF income is based on taking equity risk while bond funds are based on credit risk. The capital loss in dividend funds is share price falls which capital loss in bond funds is mostly from principal defaults. In a capital structure bonds have a higher priority versus equity; hence the returns on bonds should be lower on a like for like basis.
As a result, the equity income strategies are higher risk than investing in a bond fund. The offsetting factor is that on the equity side there is also the added benefit of capital appreciation.
International Equity Index Funds
Why invest in international ETFs?
Global ETFs allows investors a quick and effective way of diversifying the portfolio by adding international equity exposure to the portfolio. International share exposure provides investors important diversification benefits as the Australian share market comprises only 2% of the global investable market or seen in another way 2% of all possible investment opportunities.
The table below shows some of the most well known market indexes in Europe, America and Asia. The various market show’s performance shows owning just shares in the same market is like putting all your eggs in one basket.
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There are index funds that follow all of the major markets but Australian investors seem to like to segregate their international portfolio allocation across three major types of funds:
- The largest international ETF on the ASX is the fund that tracks the most well known US benchmark, the Standard and Poor 500 (S&P 500), iShares S&P 500 ETF).
- The US equity market makes up one of the largest markets in the world. One way of having international exposure without the US market is Vanguard All-World ex US Shares Index ETF
- Global equity index fund such as Vanguard MSCI Index International Shares ETF invests across all major global equity markets.
Asia ETFs
Asia is the closest major market to Australia, so it makes sense there are several direct investment options to invest in the Asian equity markets.
Emerging Market Index Funds
Emerging markets index funds were one of the first macroeconomic factor ETFs. Whilst EM has underperformed recently and the historical performance has been patchy. It is still the goto area for investors looking for high risk and high return outcomes.
Global Sectors ETF
Index funds that track companies in the same sector across the globe. Examples include healthcare ETFs, gold miners or energy companies.
Global Smart Beta ETFs / Strategy ETFs
Similar to the factor ETFs but with a focus on international equities. Major themes in the global factor ETFs are BetaShares Global Sustainability Leaders ETF and VanEck Vectors MSCI World Ex-Australia Quality ETF
Infrastructure ETF
Unlike the multitude of equity index funds there are only two major players here.
- VanEck Vectors FTSE Global Infrastructure (Hedged) ETF
- Magellan Infrastructure Fund (Currency Hedged) (Managed Fund)
REIT ETF
There are two ways of investing in real estate either directly or indirectly through a fund like a REIT. A REIT ETF is an ETF that owns a portfolio of REITs. See our post on the REIT ETF for a detailed analysis of the REIT ETF on the ASX.
Bond ETF
There are many Australian Fixed Income ETFs and Global Fixed Income ETFs on the ASX. Although the share market usually gets all investor and media attention, the fixed income market size is a multiple of the equity market.
It is just harder for retail investors to directly own bonds or fixed income securities. Most will have limited knowledge of these instruments or how the markets work.
Bonds can provide income and preserve capital with the risk and return profile changes depending on the market expectation of future interest rates. Maturity terms also play a role, longer maturity bonds will require higher returns to compensate versus shorter term bonds. For investors wanting income, Fixed Income ETFs provide an easy means of gaining exposure to this asset class with more flexible liquidity at the time of your choosing.
Mixed Asset ETF / Balanced Fund ETF
Mixed Asset funds are funds which allocate across a mix of asset classes. Traditionally they are known as balanced funds.
Currency ETF
As the name suggests these funds invest in a currency like the US dollar ETF. Currency ETFs can be useful for investors that are looking to hedge currency exposure in their equity portfolio. However, given some of these funds’ illiquid nature having tiny market caps, the FX spot markets would be more effective for large trades.
Commodity ETF
It can be difficult for small investors to open positions in commodity futures like oil, copper or wheat since futures are fixed unit contracts. Each contract can make up a disproportionate share of the portfolio and be lumpy to manage for small investors.
Commodity ETFs allow investors to gain exposure to a specific commodity like oil or gold in an exact dollar amount required.
Leveraged ETF
BetaShares Geared Australian Equity (GEAR) provides leveraged exposure to the upside of the ASX 200 index. The stated gearing ratio of the fund will range between 50% to 65%.