Exchange Traded Funds (ETFs) in Australia

Exchange Traded Funds: A Complete Australian Investor's Guide

Learn how exchange traded funds work, explore different ETF types, and understand the costs, risks and strategies for building a diversified investment portfolio in Australia.

What is an ETF (Exchange Traded Fund)?

An Exchange Traded Fund (ETF) is a managed investment vehicle whose units are traded on a stock exchange such as the ASX or Cboe, just like individual shares. Rather than buying individual securities, investors purchase units in the ETF, which holds a diversified basket of underlying assets such as stocks, bonds, and commodities. 

Most ETFs are designed to replicate the performance of a benchmark index, such as the S&P/ASX 200, thereby giving investors broad market access through a single, cost-efficient transaction.

ETFs vs Traditional Managed Funds vs Individual Shares

Compared to traditional managed funds, ETFs offer:

• Intraday trading (you can buy or sell during market hours)
• Transparent holdings
• Generally lower ongoing fees

In contrast, conventional managed funds typically price only once a day and may employ active management with higher costs. 

Compared to buying individual shares, ETFs provide investors with:

• Built-in diversification, which reduces single-company risk
• Liquidity and ease of execution

ETFs have seen explosive growth in Australia in recent years. In 2024, ASX-listed ETFs reached over A$200 billion in funds under management, with more than 360 ETFs available, making ETFs a mainstream investment vehicle. They are used by a broad spectrum of investors including retail and self-managed super funds (SMSFs) and institutional funds because they deliver a blend of diversification, transparency, liquidity, and cost effectiveness. For many investors, ETFs provide a simple, efficient route to constructing a diversified portfolio across asset classes and markets with minimal friction.

How Do ETFs Work?

The ETF Structure

ETFs operate as open-ended investment trusts in that they issue new units or redeem existing ones in response to investor demand. 

As Moneysmart explains: 

‘ETF units can be created or redeemed to match investor demand’ — helping to keep the market price of the ETF close to its Net Asset Value (NAV). Authorised participants (typically large institutions) facilitate this by delivering baskets of the underlying assets to the ETF provider or vice versa, helping them maintain liquidity and alignment between the market price and the fund’s NAV.

Physical vs Synthetic ETFs

As Moneysmart explains: 

ETFs are either ‘physically-backed or synthetic,’ noting that synthetic versions may ‘use derivatives to copy the movements of an index or asset,’ but ‘carry additional risk that the counterparty could fail.’ 

Synthetic ETFs often use swap agreements rather than holding the actual assets, and they’re generally labelled ‘synthetic’ in fund documentation.

In Australia, physically-backed ETFs are the norm. They directly hold the securities (shares, bonds, commodities) that comprise their benchmark index. 

Trading Throughout the Day

Unlike traditional managed funds which are generally priced daily, ETFs trade continuously on exchanges during market hours, with their prices fluctuating due to supply and demand and movements in the underlying assets. 

As Moneysmart notes: you can ‘buy and sell units in ETFs through a stockbroker, the same way you buy and sell shares.’ 

After a trade is executed, settlement occurs two business days later (T+2). This intraday tradability, coupled with NAV-tracking mechanisms, makes ETFs both flexible and efficient for investors.

Types of ETFs Available in Australia

Exchange traded funds cover virtually every asset class and investment strategy. Understanding the different types helps investors build portfolios aligned with their goals.

Broad Market Index ETFs

Broad market index ETFs aim to replicate major indices such as the S&P/ASX 200, S&P/ASX 300, or global benchmarks like the S&P 500. 

They offer broad, diversified exposure across whole markets or regions, often at very low cost (management fees often range from 0.03% to 0.10% p.a.). Many of Australia’s ETFs are passively managed in this way.

For example, Global X Australian 300 ETF (ASX: A300) is a broad-based ETF which tracks the largest 300 companies on the ASX.

Sector and Industry ETFs

Sector and industry ETFs concentrate on specific sectors such as technology, healthcare, financials, energy, real estate, infrastructure, and resources. Sector ETFs allow investors to tilt into industries expected to outperform, but carry higher concentration risk compared to broad market funds. 

Because these types of funds concentrate holdings in fewer sectors, they carry higher concentration risk than broad market ETFs.

For example, Global X Semiconductor ETF (ASX: SEMI) targets global semiconductor companies via a sector-focused remit. 

Fixed Income and Bond ETFs

Fixed income and bond ETFs invest in government or corporate bonds and other fixed-income instruments, delivering regular income distributions. They range from conservative government bond exposure to higher-yield corporate debt, and may include domestic and international bond markets. Fixed income ETFs are one of the core building blocks for conservative or income-focused portfolios. 

For example, Betashares Australian Composite Bond ETF (ASX: OZBD) is a diversified Australian bond ETF. 

Commodity and Currency ETFs

Commodity and currency ETFs provide exposure to physical commodities (e.g. gold, silver, oil, agriculture) or track currency movements. 

As Canstar explains: 

‘there are two types of commodity ETFs, synthetic or physical. Synthetic ETFs differ because they hold financial contracts instead of the physical underlying commodities.’ 

Such ETFs are often used as hedges or inflation protection. They may use physical holdings or futures to replicate commodity returns.

For example, Global X Copper Miners ETF (ASX: WIRE) is a commodity ETF focused on the copper mining sector.

Smart Beta and Factor ETFs

Smart beta and factor ETFs apply rules-based strategies beyond pure market-cap weighting, targeting factors such as value, quality, momentum, or low volatility. These funds aim to enhance returns or reduce risk relative to classic index approaches.

Thematic and ESG ETFs

Thematic ETFs are built around megatrends such as renewable energy, AI, robotics, or cybersecurity, while ESG ETFs screen portfolios using ESG (environmental, social, governance) criteria. 

While ESG and thematic funds are increasingly popular among values-based investors, they often carry higher fees than vanilla index ETFs.

For example, Global X Cybersecurity ETF (ASX: BUGG) focuses on the cybersecurity theme, offering investors targeted access to that evolving industry. 

Active ETFs (Exchange Quoted Managed Funds)

Unlike passive ETFs, active ETFs are managed to outperform a benchmark. 

In Australia, active ETFs must include ‘Active’ in their name. These funds typically charge higher fees (often 0.5-1.5% p.a.). 

Stockhead emphasises that ‘most ETFs are passive.’ As such, active ETFs remain a minority. 

For example, JPMorgan Global Research Enhanced Index Equity Active ETF (ASX: JREG) blends index exposure with active selection. 

Complex ETFs (Geared & Inverse)

Geared (leveraged) ETFs amplify returns (e.g. 2× or 3× index performance), while inverse ETFs aim to profit from falling markets. 

In Australia, these types of funds must carry ‘Complex’ in their product name 

They are suited only for sophisticated or tactical investors. 

Key Benefits of ETFs for Investors

Instant Diversification

A single Exchange Traded Fund (ETF) provides instant diversification across dozens, or even thousands, of securities. 

As InvestSMART explains: ‘ETFs allow you to invest in a wide range of assets with just one purchase,’ offering exposure across asset classes, sectors, and regions while reducing concentration risk. 

This structure lets Australian investors easily access markets that would otherwise be expensive or difficult to invest in directly.

Cost-Effectiveness

ETFs are among the most cost-efficient investment options available. 

CommSec notes that ‘management fees for ETFs are typically much lower than traditional managed funds,’ often between 0.03% and 0.50% p.a., with ‘no entry or exit fees—only brokerage costs.’ Because ETFs generally track an index, their low portfolio turnover also helps reduce transaction costs and capital gains tax.

Liquidity & Trading Flexibility

ETFs trade on the ASX like shares, allowing investors to buy or sell them throughout the trading day. 

According to CommSec: ETFs ‘can be traded intraday using the same strategies you would use for shares, such as limit orders or stop losses.’ 

Settlement through the ASX CHESS system adds an extra layer of security and transparency.

Transparency

Most ETF issuers disclose their full holdings daily, enabling investors to see exactly what they own. 

CommSec highlights that ‘ETF providers publish the value of the fund and its holdings daily, so you can easily track performance.’

Accessibility

ETFs are accessible to all types of investors from first-time investors to SMSFs and institutions through any standard online broker. 

InvestSMART notes that ‘ETFs have no minimum investment beyond broker requirements,’ making them a simple entry point to diversified investing. 

Flexibility in Portfolio Construction

ETFs can serve as the foundation for a ‘core-satellite’ investment strategy, combining diversified index exposure with tactical themes or direct share holdings. This flexibility makes it easy to rebalance portfolios by buying or selling ETF units.

Risks & Considerations When Investing in ETFs

While ETFs offer many advantages, investors must understand the risks involved.

Market & Asset Risk

Because ETFs track underlying indices or assets, they are fully exposed to market downturns. 

As Moneysmart explains: ‘the value of the ETF will fall if the underlying index or assets decline.’ 

In sector-specific or thematic ETFs, concentration risk is higher; so niche or emerging-market and small-cap ETFs often have greater volatility. 

Tracking Error

ETF returns may deviate from the index they aim to replicate. 

Possible causes include: management fees, transaction costs, dividend timing, sampling methods, and rebalancing. 

As Canstar explains: ‘the management fees applicable to ETFs mean that your return on investment will never exactly match the index it tracks.’ 

Always check an ETF’s historical tracking difference before investing.

Liquidity Risk

Not all ETFs enjoy high trading volumes. For niche, small, or international ETFs, liquidity may be limited, resulting in wider bid–ask spreads and difficulty executing large trades without impacting price. 

As Canstar notes: ‘in some circumstances there can be no assurance that there will always be a liquid market for units.’

Currency Risk

International ETFs expose Australian investors to AUD fluctuations. 

In short, if the Australian dollar strengthens, foreign returns shrink, whereas if it weakens, they grow. 

Moneysmart observes that ‘some ETFs are currency hedged which removes this risk.’

Please note: while hedging addresses currency risk, it adds cost.

Counterparty Risk (Synthetic ETFs)

Synthetic ETFs use derivatives like swaps which introduces the risk that the counterparty fails. 

Moneysmart states: ‘Synthetic ETFs carry an additional risk that the counterparty could fail.’ 

In Australia, physically backed ETFs dominate, but always check structure.

Dividend and Distribution Timing

ETF distributions may not align with the dividend schedules of the underlying companies, potentially affecting cash flows for income-focused investors. 

Also, franking credits may be diluted in some fund structures, reducing the tax benefits available to investors.

Complexity Risk (Geared & Inverse ETFs)

Complex ETFs (leveraged, inverse) use derivatives or borrowing to magnify returns or produce inverse performance. 

These are generally unsuitable for long-term investors due to daily rebalancing, path dependency, and most importantly, the risk of amplified losses. 

💡Tip: Before investing, review an ETF’s Product Disclosure Statement (PDS) and historical performance, understand its underlying exposure, and ensure its risk and return expectations align with your personal strategy. Moneysmart advises that while ETFs offer many advantages, ‘before you invest in an ETF do your homework — know what the ETF invests in and the risks.’ 

How to Invest in ETFs in Australia 

Through an Online Broker or Trading Platform

ETFs trade on a stock exchange, just like ordinary shares. For most retail investors, buying ETFs is done via a brokerage account. Platforms like CommSec, NAB Trade, SelfWealth, or others allow you to trade ETFs just like shares. 

Brokerage fees typically range from $5 to $20 per trade, depending on the platform and trade size. The process mirrors share trading: you place orders using the ETF’s ticker, and settlement occurs via CHESS.

Within Superannuation

Many superannuation funds and retail super platforms offer ETF investment options within their investment menus. If your super fund allows member choice, you can allocate a portion to ETFs. Investing this way also grants the benefit of being in the concessional tax environment of super, although fees may be bundled with the fund’s administration cost structures.

Through Self-Managed Super Funds (SMSFs)

SMSFs can buy ETFs directly through a brokerage account, subject to the SMSF’s investment strategy and diversification rules. 

For SMSFs, liquidity is an important consideration (especially if in pension phase). 

You must also maintain proper records and compliance with ATO rules, and ensure the ETF holdings align with the fund’s objectives.

Via Robo-Advisors and Digital Investment Platforms

Automated or ‘robo’ platforms like Raiz, Spaceship, and Stockspot typically use ETFs as building blocks for diversified portfolios tailored to your risk profile. 

They often have low minimums (some as low as $5), offer automatic rebalancing, and charge platform fees (usually 0.5 % to 1.5 % p.a., in addition to the underlying ETF fees). 

Finder describes ETF brokers and platforms with low costs and the ability to trade ETFs like stocks. 

Through Financial Advisers

Full-service brokers or licensed financial advisers can build bespoke ETF portfolios for you, providing advice on asset allocation, selection, and strategy. Although this typically comes at a higher cost (reflecting advice and service fees), it can be appropriate for investors seeking a more hands-on or guided approach.

💡Tip: Always check an ETF’s Product Disclosure Statement (PDS), consider its costs, liquidity, tax treatment (as per ATO guidance on ETFs), and ensure it aligns with your investment time horizon and goals.

How to Compare & Choose ETFs

Selecting the right ETFs requires evaluating multiple factors beyond just past performance.

Management Fees and Expense Ratios

Compare Management Expense Ratios (MER) among similar ETFs as fees directly erode returns over time. 

Global X emphasises that ‘ETF fees impact performance,’ including MER, bid/ask spreads, tracking difference and error. 

Broad market index ETFs often charge between 0.03% and 0.20% p.a., while sector or thematic ETFs may range from 0.30% to 0.70%, and active ETFs typically sit between 0.50% and 1.50%. 

Don’t simply pick the lowest fee. Balance the cost with other metrics like liquidity, performance, and structure.

Fund Size and Liquidity

Larger funds with substantial assets under management (AUM) tend to offer better liquidity. ETFs with higher average trading volumes generally have tighter bid–ask spreads, reducing the trading cost. Smaller boutique ETFs (especially those under ~$50 million AUM) risk closure or illiquidity.

Tracking Performance

Evaluate historical tracking error and tracking difference. Consistent close tracking to the benchmark indicates efficient fund management. Also, check whether the ETF uses full replication or sampling techniques, which can influence tracking accuracy.

Index or Benchmark Methodology

Understand exactly what benchmark the ETF follows. Is it market-cap weighted, equal-weighted, or a smart-beta index? How frequently is the index reconstituted? The reputation of the index provider such as S&P, MSCI, or FTSE is also a key consideration.

Distribution Yield and Frequency

For income-oriented investors, compare distribution yields and how often dividends are paid (monthly, quarterly, etc.). Also check the extent of franking credits attached to Australian equity ETFs and whether they remain consistent over time.

Tax Efficiency

ETFs are generally more tax-efficient than managed funds, but international ETFs may attract withholding taxes on dividends. Review each ETF’s annual tax statement for clarity. Be aware that currency-hedged ETFs may have distinct tax treatments.

Fund Manager Reputation

Choose ETFs from trusted providers with proven Australian track records such as JPMorgan, Global X and Betashares. 

Check how long a fund has been operating and how committed the provider is to the Australian market. 

Holdings & Concentration

Review the ETF’s top 10 holdings and their weighting. Look out for over-concentration in a few companies or sectors. 

Also assess geographic and sector diversification, and any overlap with existing portfolio holdings. 

For example, in Stockspot’s comparison of the best Australian share ETFs, they examine size, cost, slippage, liquidity, returns and track record. 

ETFs vs Managed Funds vs Individual Shares

Understanding how ETFs compare to other investment options helps investors make informed decisions.

Key Takeaways:

👉 ETFs combine the diversification of managed funds with the liquidity and tradability of shares. They are ideal for investors who want diversification without picking individual stocks.

👉 Managed funds suit investors preferring active management with the prospect of outperformance, but who are willing to pay higher fees and accept less transparency.

👉 Individual shares offer full control and direct ownership but require research, discipline, and greater capital to diversify effectively.

Tax Considerations for ETF Investors

Understanding the tax treatment of ETFs is crucial for after-tax return maximisation.

Income Distributions

ETF distributions may include dividends, interest, foreign income, and realised capital gains. 

According to the ATO: ‘you need to declare income from your ETF even if you opted to reinvest via a DRP — distributions are assessable in the year they relate to, not when cash is received.’ 

Distribution reinvestment plans (DRPs) don’t avoid tax. You’re taxed on those units as though you received cash. Many Australian equity ETFs also pass on franking credits from the companies held.

Franking Credits

When an ETF holds Australian companies that pay dividends with franking credits, investors can often claim those credits to reduce their tax. The dividend imputation system allows shareholders to offset tax already paid at the corporate level. 

As CommSec explains, to receive franking credits you usually must satisfy the holding-period rule (typically 45 days) to prevent ‘short-term trading just to get the franking credits.’ 

Capital Gains Tax (CGT)

Selling ETF units at a profit triggers capital gains tax. If you’ve held the units for more than 12 months, you may qualify for a 50% CGT discount (for individuals). 

Your cost base should include your purchase price, brokerage, and reinvested distributions. 

Tax Reporting

ETF providers issue annual tax statements showing income, franking credits, and capital gains. The ATO notes that many ETFs prefill the data into your myTax return. 

It’s essential to keep records (purchase dates, units, distributions) for at least five years. 

International ETFs introduce extra complexity. Foreign income may be subject to withholding tax, and you may be eligible to claim a Foreign Income Tax Offset (FITO). 

SMSF Considerations

In SMSFs, investment income during accumulation is taxed concessionally at 15%, and in the pension phase often at 0%. 

However, SMSFs do not receive the 50% CGT discount on disposal of ETF units. If your fund has both accumulation and pension accounts, actuarial certificates may be required to apportion the income correctly.

Popular ETF Strategies in Australia

Here are six of the most popular ETF strategies available to Australian investors.

ETF Strategy Comparison for Australian Investors

Key Takeaways:

👉 Stockspot notes that ETF strategies should match your goals: ‘Core holdings should anchor your portfolio, while satellite themes can enhance performance.’ (Stockspot)

👉 Canstar advises that ‘ETFs can be used to build diversified portfolios, earn income, or express thematic views, depending on your investment strategy.’ (Canstar)

Common ETF Investing Mistakes to Avoid

Exchange Traded Funds (ETFs) have become a core investment tool for Australians, offering diversification, transparency and low cost. Yet even experienced investors can fall into common traps that erode returns.

Chasing Past Performance

It’s tempting to buy last year’s top-performing ETF, but past results rarely repeat. Sectors that soar one year, like technology or energy, often underperform the next. Focus instead on a disciplined, long-term strategy aligned with your goals and risk tolerance.

Ignoring Fees and Costs

Small fee differences can compound into thousands of dollars over decades. Always consider total costs, including management fees and brokerage. While the cheapest ETF isn’t always best, cost-conscious investing remains essential.

Over-Diversification

Holding too many overlapping ETFs can create unnecessary complexity without reducing risk. Check for duplicate holdings and remember that five to ten well-chosen ETFs are usually sufficient.

Timing the Market

Trying to ‘buy low and sell high’ often leads to missing market rebounds. History shows that time in the market beats timing the market. Regular investing through dollar-cost averaging helps smooth volatility.

Neglecting Rebalancing

Over time, portfolios drift from target allocations. Rebalancing annually or semi-annually maintains your intended risk profile and can be done efficiently by redirecting new contributions.

Trading Too Frequently

Frequent trades generate extra brokerage and tax costs. ETFs work best as long-term holdings, so avoid reacting emotionally to short-term swings.

Misunderstanding Geared/Complex ETFs

Leveraged and inverse ETFs are designed for short-term traders, not long-term investors. Their daily rebalancing can cause performance decay, so use them only if you fully understand the risks.

The Future of ETFs in Australia

The Australian ETF market continues to evolve and expand with a number of trends at play.

Market Growth Trends

The Australian ETF market is experiencing rapid expansion. Assets under management (AUM) in Australian-listed ETFs rose from around A$172 billion to A$239 billion in 2024, representing roughly 38 % annual growth. 

According to the ASX: ‘the local market has seen phenomenal growth.’ 

This trend is supported by innovation, accessibility, and affordability. With more product launches, and rising ETF institutional uptake via superannuation funds and robo-advisors, strong ETF AUM growth is set to continue in the Australian market.

Product Innovation

The growing market of ETF providers in Australia are increasingly offering more specialised products. New launches include thematic and sector-specific ETFs, active ETFs, fixed income and alternative asset classes, as well as ESG and sustainability-focused offerings. 

Enhanced ETF accessibility through zero-brokerage platforms and robo-advisors has helped broaden retail engagement.

Regulatory Developments

Regulators in Australia continue to strengthen their oversight of the ETF market. Recent measures include improved disclosure requirements for complex ETF products, clearer naming conventions to assist investor understanding, and tighter oversight by the Australian Securities & Investments Commission (ASIC) to protect retail investors. 

The ASX notes the growing importance of market makers and transparency to help ensure fair trading of ETFs. 

What This Means for Investors

👉 The growth momentum suggests that ETFs are moving from niche to mainstream in Australian portfolios.

👉 With more product innovation, investors have greater choice, but they should still assess ETF costs, strategic fit and overlap.

👉 Regulatory improvements enhance investor protection but choosing simpler, transparent ETFs remains prudent.

👉 Institutional adoption means more competition (and potentially tighter spreads or fees) but also may improve market efficiency and liquidity.

Are ETFs Right for Your Portfolio?

Exchange Traded Funds have revolutionised investing in Australia, providing cost-effective, transparent access to diversified portfolios across virtually every asset class and investment strategy. Their combination of low fees, liquidity, and flexibility makes them suitable for investors at all stages of their journey - from beginners building their first portfolio to sophisticated investors implementing complex strategies.

However, ETFs are not a one-size-fits-all solution. Success requires understanding your investment objectives, risk tolerance, and time horizon. Take time to research different ETF types, compare costs, and consider how they fit within your broader financial plan. Whether building a simple core portfolio of broad market index ETFs or implementing a sophisticated multi-asset strategy, the key is maintaining a disciplined, long-term approach.

With over 360 ETFs trading on the ASX and over $200 billion in assets under management, Australian investors have unprecedented choice. By comparing the available ETF options carefully and staying focused on your investment goals, ETFs can play a valuable role in building long-term wealth and achieving financial independence.

Remember to consult the Product Disclosure Statement (PDS) before investing, and consider seeking professional financial advice tailored to your personal circumstances.