How to build wealth with ETFs: A guide to smart investing
Want to buy a diversified share portfolio with a single trade? Welcome to the world of exchange-traded funds.
They have only been around in Australia for 24 years, but exchange-traded funds have become a popular way to build wealth among investors of all ages.
ETFs, as they’re usually called, are similar to shares, but instead of buying one share to hold a stake in a single company, each ETF unit can give you a slice of hundreds of different companies. This reduces the risk of holding shares in a single company that can potentially go bust, and it smooths out your ride by holding smaller stakes in many companies.
Types of EFTs
The most widely held ETFs are known as index funds, because they track an index such as the ASX 200 or the S&P 500 in the US. They are designed to deliver the same return as the index they follow, minus fees averaging about 0.5 per cent annually. You are essentially owning a basket of listed companies.
More recently, specialised ETFs have surged in popularity because they focus on sectors, countries or themes.
A good example of an index fund is Vanguard’s VGS ETF, which tracks an international share index and holds about 5 per cent in Apple, 4 per cent Microsoft and Nvidia, as well as 2.5 per cent of Amazon and many other well-known global companies. The proportions of its shareholdings will change in line with each company’s movement in market value.
Specialised ETFs offered in Australia include funds focusing on robotics, cybersecurity, defence infrastructure, gold, bonds, currencies and ethical investing.
If you want to look at more obscure or emerging investments, you can buy ETFs covering cryptocurrency innovators, digital health and telemedicine, video games and E-sports, US Treasury bonds and individual countries including India, Japan, China or South Korea.
Many of these specialised ETF are actively managed, rather than the passive management of index funds, so their annual management fees can be higher, sometimes above 1.5 per cent.
History
The world’s first ETF was launched in Canada in 1990 and the first in Australia was in 2001, a State Street Global Advisors product that tracks the movements of the S&P/ASX 200 index. It’s still going today, with the ASX code STW, and has about $6bn of investors’ funds sitting in it. If you put $1000 into STW in 2001, today it would be worth more than $2300 (not including distributions), broadly following the ASX 200 index over the past 24 years.
There are now more than 360 ETF products available in Australia, and it’s estimated that in mid-2025 a quarter of a trillion dollars of Australians’ wealth was sitting in ASX-listed ETFs.
They have been particularly popular with younger generations, with social media influencers hailing them for their low management costs and ability to diversify people’s investment dollars with a relatively small outlay.
Warren Buffett loves them, too
ETFs have also been popular with the man widely seen as the world’s most successful investor, Warren Buffett. One of the richest people in the world, for many years Buffett has advocated for ETFs and has recommended that “a low-cost index fund is the most sensible equity investment for the great majority of investors”.
Index v active
If you’re tracking an entire stockmarket index, you are not placing individual bets on stocks or sectors that may implode at some point. This strategy means you won’t beat the index in the long run, but experts say active investment managers often fail to beat indices even though they’re professional stock pickers. Moneysmart.gov.au says the majority of ETFs in Australia are passive index-based investments that do not try to outperform the market, and warns that the handful of active ETFs may use higher-risk trading strategies.
How to buy an ETF
Buying into an ETF is like buying a share. You can go through an online stockbroker, full-service stockbroker, investment platform or financial adviser. Just like shares, the settlement of the trade will occur two business days later, and you will probably pay brokerage fees. If you want to skip the middleman, a small number of ETF providers – including Betashares and Vanguard – allow you to set up accounts with them and buy and sell ETFs directly without brokerage fees.
EFT risks
Diversification is a great positive of holding ETFs, as for a single $500 or $1000 investment you can be exposed to many of the world’s most successful companies. Low cost is the other big benefit, compared with traditional managed funds that historically charge higher fees. ETFs also offer transparency as it’s easy to discover which shares your ETF holds. However, as with all shares, there are always risks to investors. There is the ever present threat of a stockmarket crash, and currency moves that can affect the prices of ETFs holding overseas shares.
Tax implications of EFT investing
If you like getting your tax refunds quickly each year, ETFs can make this tricky because you need to wait for your ETF provider to send you their annual tax statement. This sometimes does not arrive until August. It will include information about capital gains, dividends, franking and other tax details, so you don’t have as much control as you do owning shares directly.
Want to learn more about ETFs? The Australian Securities Exchange offers a free ETFs course at asx.com.au.
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