When headlines are dominated by war, rate hikes and AI hype, it's easy to feel like you need to do something. Most of the time, though, the best move can be to do less.

Markets have often climbed a wall of worry, and headlines rarely help you build wealth. In fact, reacting to them is one of the fastest ways to sabotage long-term returns.

My rule is simple: build a portfolio you can hold through the next anxiety-inducing headline, because there's always another one coming. It is times like these that disciplined investors stay the course.

One of the most effective ways to deal with the noise is to build a portfolio that runs largely on autopilot. A simple, diversified ETF portfolio combined with a disciplined process can reduce the temptation to react to every headline.

In other words, you design the system so your behaviour doesn't hurt your long-term returns.

Start with broad diversification

The foundation of a set-and-forget portfolio is diversification.

Exchange-traded funds can make this remarkably simple. With just a handful of ETFs, you can get exposure to thousands of companies across Australia and around the world.

For most investors, a sensible core portfolio might include Australian shares, international shares and some defensive assets such as bonds or cash. Each plays a different role.

• Australian shares provide exposure to the local economy and, in many cases, income and franking credits.
• International shares offer diversification and exposure to global companies and industries underrepresented in Australia such as technology and healthcare.
• Cash and bonds provide a defensive cushion when markets are volatile.

Defensive assets won't thrill you in good years, but they can help you stay invested in bad ones.

Diversification doesn't eliminate volatility, but it helps spread risk across many markets and sectors. When one area struggles, another often performs better.

Think of diversification as your portfolio's anti-panic system.

Automate your investing

Once your structure is in place, the next step is automation.

One of the most powerful habits investors can develop is contributing regularly, regardless of what the market is doing. By setting up automatic contributions into your ETF portfolio, investing becomes routine rather than a decision you need to revisit each month.

This approach also harnesses dollar-cost averaging. When markets fall, your regular contribution buys more units. When markets rise, you buy fewer. Over time, the average price smooths out.

Automation forces you to buy when you least feel like it, which is usually when it matters most.

Rebalance once a year

Even diversified portfolios can drift over time.

If shares have a strong run, they can become a bigger slice of your portfolio than originally intended. After a downturn, the opposite can happen. That is where rebalancing comes in.

A simple annual rebalance is usually enough. Pick one date a year and reset your portfolio to your target allocation.

This forces you to sell a little of what has done well and top up what has lagged. In effect, you are buying low and selling high in a disciplined way. Crucially, you are doing it based on a plan rather than reacting to market narratives. Rebalancing shouldn't feel exciting. If it does, you're probably trading.

Ignore the story of the day

Markets produce non-stop stories. Some are convincing, many are alarming and almost all are short-lived.

The problem for investors is that getting caught up by headlines can lead to bad timing, whether that means selling after a fall or waiting for the "perfect" moment to invest, only to miss the recovery

A well-constructed ETF portfolio acknowledges that volatility is part of investing. Instead of reacting to the latest news from Iran, China or anywhere else in the world, focus on what you can control: diversification, regular contributions and disciplined rebalancing.

When the system is working in the background, you are far less likely to make emotional decisions.

And over the long term, that behavioural advantage can matter far more than being "right" about the next headline.

• Find out how we chose the winners
• Order your copy of the bumper awards issue
• Check out more from Best of the Best 2026

A generation ago, investing in international equities was complex and often costly. Today, Vanguard has transformed the landscape, making it easier than ever for Australians to diversify their portfolios.

Vanguard's MSCI Index International Shares ETF (ASX: VGS) is a titan in the industry and Australia's second-largest ETF. It offers exposure to approximately 1300 securities across developed international markets, including household names such as NVIDIA, Microsoft, Meta, Alphabet, Tesla and JP Morgan Chase.

Backed by Vanguard's global scale, client-first culture and nearly 50 years of index fund management expertise, VGS gives investors low-cost access to developed international equity markets in a single product.

Vanguard's global reach means trades are passed to the local team for them to manage during their time zone, helping deliver low-cost execution for investors.

Daniel Shrimski, managing director of Vanguard Australia, says 2025 has been a record year for inflows into ETFs.

"ETFs like VGS have transformed the investment landscape, with cost-effective, liquid and transparent access to diversified portfolios with a single trade," he says.

How do you find the best managed funds and ETFs?

Rainmaker's managed funds and exchange traded funds awards consider a variety of factors to determine winners and finalists.

While overall medium term (five-year) performance is important, it is only one factor among many.

Our quantitative process also considers investment risk, in the form of volatility (standard deviation) and downside volatility (the variability of negative returns generated by the fund).

Accounting for a fund's risk is critically important, because it would be naive to simply award funds with the highest returns if they had also subjected investors to the highest risks.

To further improve our performance insights, we also examined performance persistence (or consistency) relative to the peer group using annual performance in each of the preceding five years.

In other words, performance persistence is more interested in rewarding investment providers that have a time series of annual returns that are competitive against the peer group, rather than just a higher average return for the period.

Finally, in some asset classes such as shares, an adjustment is made depending on whether a product has shown a persistent bias to style factors, such as value, growth and small-caps.

The best managers are chosen for having the most products shortlisted in most categories. The products are ranked in each category, and this ranking determines the number of points given to each product. The manager with the most points determines the winner.

• Find out how we chose the winners
• Order your copy of the bumper awards issue
• Check out more from Best of the Best 2026

With more than 1800 companies listed on the ASX, it can be challenging for investors to decide which shares to select.

Our winner, BlackRock Investment Management, solves the problem, giving investors access to 20 market-leading stocks in a single investment through its iShares S&P/ASX 20 ETF.

Tamara Stats, iShares and index investments specialist, BlackRock Australasia says, "The iShares S&P/ASX 20 ETF (ASX: ILC) gives investors exposure to Australia's top 20 companies, supported by the resources and expertise of a global investment manager.

"BlackRock's scale helps deliver tight index tracking, liquidity and competitive pricing. Our risk management and governance frameworks are designed to deliver consistent outcomes for investors."

BlackRock, a US-based fund manager, can be described as a giant of the industry. It is the largest ETF provider with 29% of the global market.

Yet BlackRock is no stranger to the ASX. Stats explains, "BlackRock launched its first iShares ETFs in Australia in 2007, making us one of the pioneers of the local ETF industry and providing Australian investors with 
access to global equities."

How we found the best managed funds and ETFs

Rainmaker's managed funds and exchange traded funds awards consider a variety of factors to determine winners and finalists.

While overall medium term (five-year) performance is important, it is only one factor among many. Our quantitative process also considers investment risk, in the form of volatility (standard deviation) and downside volatility (the variability of negative returns generated by the fund). Accounting for a fund's risk is critically important, because it would be naive to simply award funds with the highest returns if they had also subjected investors to the highest risks.

To further improve our performance insights, we also examined performance persistence (or consistency) relative to the peer group using annual performance in each of the preceding five years.

In other words, performance persistence is more interested in rewarding investment providers that have a time series of annual returns that are competitive against the peer group, rather than just a higher average return for the period.

Finally, in some asset classes such as shares, an adjustment is made depending on whether a product has shown a persistent bias to style factors, such as value, growth and small-caps.

The best managers are chosen for having the most products shortlisted in most categories. The products are ranked in each category, and this ranking determines the number of points given to each product. The manager with the most points determines the winner.

So how do you figure out which ones are worth a closer look? At InvestSMART, we look at five key metrics when we choose ETFs for our diversified portfolios: size, fees, liquidity, tracking error and bid/ask spread. These also form the basis of our five-star ratings and are simple checks any investor can use when comparing similar funds.

Here's a closer look at each of them and why they're important.

Size: bigger is usually better

Size, or funds under management (FUM), is one of the clearest indicators of an ETF's strength. Larger ETFs benefit from economies of scale, which makes them cheaper to run and less likely to be shut down. Smaller ETFs, even those with good returns, are at greater risk of being wound up because they often don't reach the scale needed to remain viable.

Closures happen more often than many investors realise. And when that happens, you don't get to choose the timing - you're forced to sell, which can mean locking in a loss or triggering a capital gain you weren't planning for.

That's why size brings stability. Large, broad ETFs such as the Vanguard Australian Shares ETF (VAS), which holds more than $20 billion in assets, are the types of funds that tend to stick around.

Fees: small differences, big impact

ETFs are known for being low cost, but fees still matter. The management fee (MER) directly reduces your return, and even small differences add up over time.

For example, based on InvestSMART's data, fees for Australian share ETFs range from 0.04% to 0.40%, with the average sitting at 0.18%. Over the 30 years to June 2025 Australian shares returned an average of about 9.3% a year, according to Vanguard. If you invested $50,000 and earned that return, at a low fee of 0.04% your balance would grow to roughly $712,000 over 30 years. At the average fee of 0.18% it would be closer to $683,000, a difference of around $29,000 from a fee gap of just 0.14%. Comparing fees between ETFs that track the same index is crucial. The lower the fee, the closer your returns will be to the index, and the more of your money stays invested and compounding for you.

Liquidity: can you get in and out easily?

Liquidity is important but often misunderstood. Put simply, it about how easily you can buy or sell an ETF at a fair price. A highly liquid ETF lets you trade quickly without the price jumping around. An illiquid one can be slower, harder and more expensive to buy or sell.

A helpful analogy is buying apples. Buying apples at a major supermarket is easy: there's plenty of stock, lots of customers, and prices are stable. That's high liquidity. But at a small roadside stall, there may be only a few apples, some days there are none, and prices move depending on who turns up. That's low liquidity.

Investing in a liquid ETF is like shopping at the supermarket. You get a fair price, you can buy or sell whenever you need to, and the price won't suddenly jump. Trading is smooth and predictable.

With ETFs, liquidity doesn't just come from how often the ETF itself trades. It also depends on how easily the companies inside the ETF can be traded. An ETF filled with large companies like BHP or Commonwealth Bank is naturally very liquid. One full of small, niche companies is less liquid.

That's why broad-based ETFs tracking major indices, such as the ASX 200, tend to be highly liquid, and why they're often the preferred building blocks for diversified portfolios.

Tracking error: does it actually follow the index?

Index ETFs are designed to follow the index they track, and the tracking error shows how well they manage to do that. A tracking error of less than 0.5% a year is considered acceptable for broad market ETFs.

Why does it matter? If the index goes up 10%, you want your ETF to deliver something very close to 10%, minus its fees. A low tracking error means you're getting the performance you signed up for. A high one can be a sign the ETF isn't replicating the index well.

Bid/ask spread: the hidden cost

The bid/ask spread is the gap between what buyers are willing to pay and sellers are willing to accept. The difference is essentially a hidden cost because it affects the price you end up paying when you buy and the amount you receive when you sell.

Large ETFs usually have spreads of a few cents while niche funds can have much wider spreads. Checking the spread before you invest can help you avoid paying a premium when you buy or losing more than you need to when you sell.

We use these factors in our annual ETF Scorecard, which rates every ETF on the ASX, and it shows one thing very clearly: choosing an ETF isn't about chasing trends. It's about understanding structure, size, cost, liquidity and how well the fund does its job. Keeping these basics in mind makes it much easier to sort through your options and build a low-cost portfolio that can go the distance.

Their strong performance has driven impressive returns for equity ETFs with heavy US exposure. Take the S&P 500 Total Return Index, for example. As of mid-September, it had delivered an average annual return of more than 20% (in AUD terms) over the past three years.

But markets don't stand still and past performance is not a reliable indicator of future performance. As cycles shift and the definition of large cap tightens, leaning too heavily on these giants can mean taking on more risk than you might expect.

Portfolios focused solely on large-cap growth are starting to look more alike and less resilient. These stocks can swing sharply when sentiment changes or sector leadership rotates, and investors who concentrate here may miss out on opportunities in other sectors or regions.

That's where diversified ETFs come in. They're designed to address these challenges by spreading risk across asset classes, sectors and geographies, all in a single, professionally managed fund.

Instead of betting on a few big players, diversified ETFs invest in thousands of securities from both local and global markets.

The Vanguard Diversified All Growth Index ETF (VDAL), for example, holds more than 6000 securities.

These funds are also regularly rebalanced, meaning investors don't need to actively monitor markets or make frequent adjustments themselves.

One of the biggest advantages is that diversified ETFs also overcome home country bias, an investor's natural tendency to invest mostly in familiar, local markets.

It can be tempting to stick with what's familiar, but diversified ETFs ensure investors are tapping into opportunities around the world, not just in their backyard.

There are two main ways to use diversified ETFs. First, as a standalone investment - just hold the diversified ETF that best aligns to your risk tolerance and you're done.

Second, as the core of a portfolio - using a core-satellite strategy. One way to approach this is by anchoring your portfolio to a diversified fund for low-cost and broad diversification.

Then, if you wish, adding smaller 'satellite' positions in specific sectors or themes to meet your individual goals.

How to invest $10k

Everyone's situation is different and factors such as time horizon, risk appetite and liquidity needs should always be considered.

One way to think about building a resilient portfolio is to anchor most of it in a diversified ETF, which provides broad exposure, keeps costs low and helps smooth out the ups and downs of day-to-day market activity.

Then if you want to lean into a particular theme or sector outside the core, you might consider adding satellite positions in sector or thematic ETFs.

This approach helps ensure you're not putting all your eggs in one basket - instead you're still positioned to benefit from a wider range of market opportunities.

This kind of core-satellite approach helps to stay diversified while still having room for investors to personalise their portfolio depending on their individual circumstances.

Adam DeSanctis is the head of ETF Capital Markets, Australia

More than a decade on, I'd like to resurrect the term to serve a better purpose: banks have to consciously uncouple their saving products, such as term deposits (TDs) and savings accounts, and their lending products, such as fixed and variable home loans.

Doing so would get us out of this zero-sum game where an interest rate cut by the Reserve Bank (RBA) means rates are lower for home loans without pushing down rates for TDs. As it is, home loans and TDs are strange bedfellows. Where one goes, the other one follows.

You could argue that a small arbitrage is at play. Home loan repayments currently range between 5%-8%pa, while TDs sit between 3%-5%pa.

To decide where you should put your money, you have to choose between higher savings or convenience. Easy calculations will show you that paying down your home loan is the winner because of the rate differential, but repayments aren't as liquid as TDs unless you're using an offset account.

Either way, keep your options open and never just settle for your existing bank. After three interest rate cuts since February, shopping around for the bank with the lowest rates for home loans and the highest rates for term deposits is a must.

Seniors should ask about TDs designed for pensioners, while homeowners or investment property owners should make it a habit to refinance at least every two years.

Last year, total home loan debt was $2.3 trillion with the average home loan repayment sitting at $25,600 per year. If you're home loan rate is above 6% or your savings rate is below 3%, there's a high chance you can find a better deal elsewhere.

Where I would invest $10k

Last year, Australia hit a new record in the electric vehicles (EVs) market. With more than 100,000 EVs sold in 2024 and new market entrants offering EVs at cheaper prices this year, we could be in the fast lane to the EV industry forecasts of a million EVs on the road by 2027.

That's not to say that EVs will outnumber other cars anytime soon. Not by a long shot, but I can't imagine a Gen Z, Gen Alpha or Gen Beta buying anything other than an EV if prices keep going down.

Car-sharing Uber already has a net-zero goal by 2040, supporting its fleet drivers to drive EVs.

Not for the faint-hearted because there are risks attached, but I would put my $10k on ETFs that offer exposure to EV and EV-related companies.

WHERE TO INVEST $10K: 13 questions you need to ask

At a glance

• ETFs are now a common entry point for new investors, especially younger Australians.
• Many say ETFs boost their knowledge and confidence, but non-investors still lack understanding.
• People buy ETFs for diversification, low fees and easy access.
• Most invest through platforms and use mixed contribution habits.
• The ETF market keeps expanding, creating more choice and confusion.

Australians have long learned investing through advisers, magazines or tips from friends.

Increasingly, they're also turning to exchange-traded funds (ETFs) as a way to build knowledge and confidence.

Money's survey of 676 readers shows exchange-traded funds (ETFs) are fast becoming the entry point for new investors.

Four in ten ETF investors say ETFs improved their investing knowledge, while nearly a third gained confidence to branch out.

ETF adoption is strongest among younger investors: 81% of those under 34 in Money's survey say ETFs improved their understanding of investing. Separate research shows one in three young investors (average age 21) now own them.

In Australia, ETF ownership jumped from 1.3% of the population a decade ago to one in five now.

It says a lot for an industry that has rocketed from $0 globally in 1993 to $26 trillion today.

"ETFs are one of the greatest investment stories of our time," says Vanessa Walker, Money's managing editor. "They've become the gateway to investing for many readers."

How Australians are investing

Most ETF investors buy through platforms rather than advisers, with 93% choosing the direct route.

Their habits vary: some tip in lump sums or reinvest dividends, while others stick to regular contributions.

About a third invest monthly or more, and just over 40% add funds a few times a year.

Dollar-cost averaging is less common, with only 18% relying on it exclusively and another 13% mixing strategies.

"ETFs may be relatively new, but dollar-cost averaging is still one of the most reliable ways to build consistent habits," says Walker.

When it comes to choosing an ETF, reputation matters most. Six in ten respondents said the issuer's track record influenced their decision.

Half said the investment theme - whether that's technology, sustainability, bonds or something overseas - helped sway their choice. Yield came next.

Technical factors such as liquidity and expense ratios matter less for most investors in practice.

Walker says it all comes back down to trust.

"Investors are entrusting their money to institutions and want to be sure they are partnering with a trustworthy organisation."

Why Australians buy ETFs

Diversification remains the biggest drawcard for ETF investors, with nearly nine in ten respondents pointing to it as their main reason for buying.

Low fees (53%) and easy access (52%) followed.

"Consumers value being able to invest smaller amounts from their phones at any time, knowing they can access a range of underlying assets at a low price," Walker says.

There are trade-offs, of course. Investors don't get voting rights over the underlying shares, and small trades can come with proportionally high costs.

As Walker points out, a $2 brokerage fee on a $100 purchase means you're starting 2% in the red.

"Fees are a detail that's easy to overlook but can add up over time."

Why some Australians still don't invest in ETFs

Knowledge is the biggest barrier.

Two-thirds of non-ETF investors in Money's survey said they simply don't understand how ETFs work.

More than a third admitted they're unsure how to pick a strong performer - something unpacked in Money's feature on the Top 20 ETFs Australians are investing in now.

Only a small minority, fewer than 8%, said they prefer other investments.

Walker says that gap isn't surprising given how fast the market has grown.

There were 370 ETFs listed as at June 30, 2025, up from 212 five years earlier, according to Rainmaker Information, Money's parent company.

And the number keeps climbing with new cryptocurrency and thematic strategies entering the mix.

"Honestly, the choices can feel overwhelming," Walker says. "Helping people cut through that noise is going to be huge... and it's something Money is focused on as we gear up to announce our 2026 ETF Manager of the Year on December 1."

The growth in ETFs has been the single most disruptive trend within the asset management industry over the past 30 years. The sector has rocketed from $0 under management in 1993 when State Street launched the first ETF in the US to US$16.99 trillion ($26.12 trillion) at June 30, 2025, according to data from independent research firm ETFGI.

That first ETF - the SPDR S&P 500 ETF Trust (SPY) - has returned its investors 10.03%pa for 32 years since its inception in January 1993 and it is still one of the biggest in the world.

Australian investors have well and truly jumped on the ETF bandwagon. Record inflows, combined with a positive market performance, pushed the total value of the Australian ETF industry to a fresh all-time high of $289.2 billion in funds under management (FUM) at the end of July, according to data from Betashares.

Strong and growing appetite from investors reflects rising confidence in ETFs as a simple, low-cost way to build a diversified portfolio, says investment advice firm The Motley Fool.

"ETFs enable investors to buy a basket of shares, usually tracking a specific index through a single trade for one brokerage fee. They're less volatile than individual ASX shares and they remove the need to spend hours researching individual companies."

"It's no wonder more and more Australians are using ETFs to build wealth, save for retirement and invest for their children's future," says Ron Hodge, InvestSmart group chief executive.

How ETFs work

An ETF is a fund that is listed on an exchange, such as the Australian Securities Exchange (ASX) and Cboe Global Markets (CBOE) in Australia. Investors can trade ETFs in the same way they buy and sell shares, bonds and real estate trusts on an exchange.

You can buy an ETF for $500, sometimes less and, if you use an online broker, your fees may be as low as $0.

An ETF holds a basket of securities on behalf of the investor. Some investors own shares, others invest in bonds and some in property. There are myriad other choices including commodities, currencies, private credit, alternatives and multi-sector. Thanks to the 388 ETFs listed in Australia, investors can access every market, sector and investment style available.

What's new

There were 49 new Australian ETFs launched in the year to June 30, 2025: 25 active and 24 passive.

Some experts say the increase in active funds partly signals rent-seeking by fund managers keen to keep the money rolling in. Many urge investors, especially newbies, to be wary of active funds as many of these underperform.

ETF major players

• Vanguard is the number one player in the Australian ETF market, with $68.5 billion FUM at March 31, 2025, according to financial research provider Rainmaker, publisher of Money. It's also one of the biggest global ETF and managed fund providers, headquartered in the US. After five decades of housing its mutual funds and ETFs under one umbrella, Vanguard has decided to divide them into two wholly owned management units. According to a statement from Vanguard: "Establishing separate investment management teams will create a number of benefits for our investors and our organisation, including management teams with an even deeper focus, investment teams with greater flexibility, and highly talented crew with more opportunities for growth."
• The second largest player is Betashares, an Australian-founded and managed firm specialising in ETFs. It has $46.14 billion FUM, according to Rainmaker data. 
• The world's largest asset manager BlackRock, headquartered in New York, comes in as the third biggest in Australia with $42.69 billion FUM. 
• VanEck is the fourth largest player in Australia with $24.13 billion FUM. Established in 1955 and headquartered in the US, VanEck has become a global ETF leader, offering cutting-edge strategies in smart beta, alternative assets and thematic exposures. In 2006, as investors' desire for liquidity, diversification and efficiency led to the growth of ETFs, it launched the US's first-ever gold miners ETF. 
• Global X, State Street, Perth Mint, Russell Investments, Legg Mason and Fidelity round out the top 10, according to analysis from Rainmaker.

Vanguard

In March 2025, Vanguard launched the Vanguard Diversified All Growth Index ETF (VDAL) and the Vanguard Diversified Income ETF (VDIF) to add to its four existing diversified ETFs, which range from conservative to high growth.

VDAL gives investors exposure to more than 6000 stocks listed on more than 50 global markets, such as Australian stocks, global stocks, emerging markets and global small caps. It's designed for investors with a high-risk tolerance who are seeking long-term capital growth and is likely to especially appeal to younger investors.

VDIF is constructed for investors looking for regular income with some capital growth potential, without giving up the benefits of diversification. It has a 40% allocation to defensive assets and 60% to growth. It offers exposure to more than 12,000 securities. VDAL's management fee is 0.27% and VDIF's is 0.32% and both are available on Vanguard's Personal Investor platform where minimum investment is $200 and brokerage is $0.

Betashares In August, Betashares launched a new ETF - the S&P Australian Shares High Yield ETF (HYLD), for income-orientated investors, paying monthly dividends. It aims to provide higher income than the broad Australian sharemarket, while avoiding the shortcomings of traditional high-dividend strategies by seeking to screen out potential dividend traps.

BlackRock

With 52 passive ETFs in Australia, BlackRock launched its first Australian active ETF in June: iShares US Factor Rotation Active ETF (IACT) - off the back of its US counterpart of the same name, DYFN.

IACT aims to outperform the broad US equity market by tactically allocating across six economic drivers of returns: value, quality, momentum, size, growth, and minimum volatility - based on evolving market conditions.

It's actively managed to favour stocks demonstrating these return characteristics, ultimately seeking to reduce short-term cyclical volatility and deliver outperformance relative to the broader market over time.

VanEck This year, VanEck launched two new Australian funds that tap traditionally hard-to-reach markets for retail investors. These are the VanEck Australian RMBS ETF (RMBS), a residential mortgage-backed securities strategy, and the VanEck India Growth Leaders ETF (GRIN).

Global defence

Reflecting global geopolitical tensions, three global defence ETFs, with somewhat quirky acronyms, were launched in the past year. Global X Defence Tech ETF (DTEC) aims to give investors access to the sectors driving the future of defence. This includes AI, drones and cybersecurity.

• Betashares Global Defence ETF (ARMR) gives investors exposure to up to 60 leading companies, which derive more than 50% of their revenue from the development and manufacturing of military and defence equipment, as well as defence technology, including Lockheed Martin, BAE Systems, General Dynamics and Palantir Technologies. It only holds global companies headquartered in NATO-member and major NATO-ally countries, such as Australia, Japan and South Korea.

• VanEck Global Defence ETF (DFND) aims to give investors exposure to the largest global companies involved in aerospace and defence, research and consulting, application software and electronic equipment and instruments, which are typically under-represented 
in benchmarks.

What you need to know about fees 

While ETFs are a great product for beginners, you do need to understand the costs involved.

If you're starting your investment journey, you may be attracted to micro-investing apps, which let you start investing with small amounts, sometimes just spare change.

Most of these invest your money in ETFs. But a problem can be the fees, including flat fees, which can  be expensive, especially on smaller balances. For example, if you invest $20 and there is a $4.50 monthly fee, the investment will be worth zero in six months if there is no capital appreciation.

For most people who decide to start out investing directly in ETFs, a big attraction is that they are usually cheaper than actively managed funds, but cost is still important.

"Fundamentally, you need to know the ongoing management fees and what the trading costs are," says John Dyall, head of investment research at Rainmaker.

"Some ETF managers - specifically Vanguard and Betashares - have their own investment platforms where investors can invest with no brokerage and with as little as $200. Start early enough and $200 a month builds to something meaningful."

Dyall also hails State Street's reduction of fees on 12 out of 17 Australian ETF products, starting in late 2023 as potentially a "game changer".

"State Street is the third largest ETF provider in the US and can't afford to let the Australian market be its one failure point. The fee reduction means that State Street is back in the business of providing ETFs to Australian investors. And for investors looking for a market that has both size and competition, this is good news."

The appeal of ETFs

Apart from low cost, the obvious attractions of ETFs for beginner and more experienced investors include diversification, transparency - ETFs publish their NAV (net asset value) daily - and liquidity as most are easy to trade on a daily basis.

From a tax point of view, index-tracking ETFs are tax effective because they generally pursue a 'buy and hold' strategy as they seek to track their benchmark. Low turnover reduces distributed capital gains in a portfolio meaning that investors can delay the amount of tax they pay.

When an ETF receives dividends that include franking credits, those dividends and the attached franking credits flow through to investors directly via the quarterly distributions.

InvestSmart's Ron Hodge says: "The 10 top performing ETFs speak volumes about three key trends that have shaped investment markets over the past 12 months - the extraordinary rise of digital currencies, the boom in gaming and esports and the flight to gold, which has been driven by volatile markets and an uncertain geopolitical environment."

1. Digitalx Bitcoin ETF (BTXX) 

"This ETF couldn't help but delight investors over the past year, with a one-year return of 95.5% that would have seen investors nearly double their money in 12 months," says Hodge. But the fund faces some challenges having launched just over a year ago and still to prove itself over the long term. "It's a passive holder of Bitcoin, leaving it highly exposed to downturns in a single cryptocurrency and history tells us just how volatile Bitcoin can be."

2. Betashares Video Games and Esports ETF (GAME) 

With a one-year return of 90.3%, this ETF is a close second.

"While themed funds have the downside of concentrating risk, GAME capitalises on a market where continued growth is real, with the global online gaming market valued at US$225 billion ($343.83 billion) and forecast to grow to US$424 billion ($647.92 billion) by 2032," says Hodge. Investors get exposure to major industry names including Roblox Corp and Nintendo and offers geographic diversity with holdings in the US, Japan and China.

3. VanEck Bitcoin ETF (VBTC) 

This ETF returned 76.5%. It gives investors access to the world's first and largest decentralised currency. It's only a year old and carries similar risks to Digitalx Bitcoin.

4. VanEck Video Gaming and Esports (ESPO) 

Returning 66.4%, this fund gives investors exposure to a diversified portfolio of the largest and most liquid companies involved in video game development, esports and related hardware and software globally. The three-year return to June 30, 2025 is 35.34%pa.

5. Betashares Global Gold Miners ETF (MNRS) 

With a 54.7% return, this fund invests in a portfolio of the world's leading gold-mining companies, enabling investors to spread risk simply and cost-effectively beyond the relatively small Australian gold mining sector. Since inception in July 2016, it has returned 7.84% a year to July 31, 2025.

6. VanEck Gold Miners ETF (GDX) returned 52.7%.

7. iShares China Large-Cap ETF (IZZ) returned 44.9 %.

8. Global X Gold Bullion ETF (GXLD) returned 43.0%.

9. VanEck Gold Bullion ETF (NUGG) returned 42.7%.

10. iShares Physical Gold ETF (GLDN) returned 42.7%.

Active and passive ETFs explained

While some investment managers talk up the benefits of active management - to tap into different types of investors and to keep the funds rolling in - the statistics and weight of money flowing into ETFs tell a different story.

Passive ETFs - market cap index products - held 83% of total FUM at the end of March 2025, according to Rainmaker. Active products contributed 5% and smart beta 11%.

The SPIVA scorecard (S&P indices versus active) for the 2024 calendar year paints a gloomy picture for Australian active managers, in particular over the long haul.

In Australian equities, 56% of active managers failed to match the benchmark return of 11.4%. Over the longer term, 15 years, 85% of active managers underperformed.

In global equities, 85% underperformed over 2024 and 95% over 15 years. It was a similar story in Australian equity A-REITs (Australian real estate investment trusts) with 86% failing to beat the benchmark of 18.5% in 2024 and 87% underperformance over 15 years.

Australian mid and small caps fared best over 2024 with only 30% underperforming the benchmark of 10.5%. Over 15 years, 58% underperformed. Active Australian Bond managers also did relatively well with 37% underperforming the benchmark of 2.9% over 2024. But over 15 years underperformance amounted to 82% of active managers.

High fees are a barrier to investing in active ETFs, with investment research company Morningstar finding the average asset weighted fee for an Australian active ETF is 0.97%, while it is 0.23% for a passive one.

"High fees are a major reason active funds continue to fail in Australia, and active managers aren't really using the ETF structure to solve that problem. They're just hoping the ETF label will attract new money, but the data shows investors are increasingly voting with their feet towards lower-cost, index-based strategies," says Chris Brycki, founder and chief executive of online investing platform Stockspot.

Brycki criticises active managers for "simply repacking their existing managed funds into an ETF format rather than creating lower-cost, fit-for-purpose active products that align with what investors want - simplicity, transparency and value".

The ongoing decline in managed funds has meant that "dual access is seen by many managers - particularly active managers - as a way of tapping into a rapid growth distribution channel. And to access self-directed investors," says Rainmaker's Dyall.

ETFs with 'dual access' structures, accessible through both ASX-listed and unlisted distribution channels, are not included in Money's list of its top 20 ETFs (based on FUM) because, as Dyall points out, it's difficult to determine how much money is held in the different distribution channels.

"The success of index ETFs is not just about the format. It's about a bigger shift in the investment world. Power is moving from product manufacturers to investors. People want simple, low-cost, diversified investments that do what they say on the tin. They want transparency and control," says Brycki.

"There is still something missing from this brave new world of portfolio construction; a platform where investors can input their ETFs, change their allocations, and understand systemic risks that are the underlying drivers of returns," says Dyall.]

Top five ETF platforms

1. CMC Invest $0 brokerage for ASX trading of less than $1000. ETF screeners allow investors to filter funds to suit their investment strategy.

2. Betashares Direct The auto-invest feature allows investors to set up recurring deposits into their Betashares ETF. $0 brokerage on ASX-listed ETFs. A good option for investors looking to dollar-cost average into the market.

3. Wellbull $0 brokerage offer on Australian and US ETFs.

4. Vanguard Personal Investor $0 brokerage for trading in Vanguard ETFs with a $9 fee for other trades.

5. Tiger Brokers Low fees and a low minimum investment. ETF brokerage fees are $3 per trade on Australian stocks and US$2 on US stocks. Investors can set up a regular deposit into US stocks or ETFs with as low as US$2.

How to choose the right ETF

Investment platform Pearler recommends the following:

• If you are starting out and want the simplest investment experience, a low-cost diversified ETF that matches your risk -return appetite - conservative to high growth - might fit the bill. 
• For investors who want the lowest cost and/or slightly more control, passive ETFs might suit. "With these ETFs, you typically want to choose one to five ETFs, then allocate percentages to them. For example, you may want 40% in an Australian Shares ETF; 40% in a Global Shares ETF; 10% in an Australian Bonds ETF; and 10% in a Global Bonds ETF."
• Factors to consider:
  • How big is the ETF - size matters because an ETF must reach a certain size to be viable.
  • How much it trades - if liquidity is important to you, favour those with higher trading volumes, 
  • How much it costs - the fewer fees paid the faster your investments grow.
  • Its track record - look for competitive and consistent long-term performance.
  • Success in tracking its index - measures how well an ETF has mirrored its benchmark or index and the closer the better.
• It's important to include global ETFs for diversification.
• Be aware of doubling up on investments. As can be seen from the Top 20 funds with similar labels all invest in the same stocks, so choose the one that best fits your needs in each category rather than several and doubling up on securities unless that is your aim.

1. Vanguard Australian Shares Index ETF (ASX: VAS) 

Australia's largest ETF, giving investors exposure to Australia's top 300 companies listed on the ASX. It offers potential long-term capital growth plus dividend income and franking credits.

Fund facts
• Assets under management (market capitalisation) at August 11, 2025 - $21.68 billion.
• Benchmark - S&P/ASX 300 Index. 
Total returns to July 31, 2025
• 1 year - 11.81% (11.88% benchmark).
• 5 years - 12.16% (12.17%). 
• Since inception in May 2009 - 9.39% (9.49%). Quarterly distributions.
• Top 5 holdings - CBA, BHP, CSL, NAB, WBC.
• Management fee - 0.07%.

2. Vanguard MSCI Index International Shares ETF (VGS) 

Invests in about 1300 companies from developed countries, excluding Australia. With just one trade, investors can go global with exposure to the world's largest companies from about 23 countries.

Fund facts
• Assets under management at August 11, 2025 - $12.22 billion.
• Benchmark - MSCI World ex-Australia (with net dividends reinvested) in Australian dollars Index.
Total returns to July 31, 2025
• 1 year - 17.52% (17.49% benchmark).
• 5 years - 16.38% (16.32%). Quarterly distributions.
• Top 5 holdings - NVIDIA, Microsoft, Apple, Amazon, Alphabet. 
• Management fee - 0.18%.

3. iShares S&P 500 ETF (IVV) 

Provides low-cost access to the top 500 US stocks in a single fund, making it an easy way to diversify into large US companies.

Fund facts 
• Assets under management at 
August 11, 2025 - $11.57 billion.
• Benchmark - S&P 500 Index.
Total returns to July 31, 2025
• 1 year - 16.29% (16.33% benchmark).
• 5 years - 15.85% (15.88%).
• Since inception on May 15, 2000 - 7.96% (8.02%). Quarterly distributions. 
• Top 5 holdings - Microsoft, NVIDIA, Apple, Amazon, Meta. 
• Management fee - 0.04%.

4. Betashares Australia 200 ETF (A200) 

Gives diversified exposure to Australia's 200 largest companies listed on the ASX in a single trade. It's the lowest cost Australian shares index ETF available on the ASX.

Fund facts
• Assets under management at August 11, 2025 - $8.09 billion.
• Benchmark - Solactive Australia 200 Index.
Total returns to July 31, 2025
• 1 year - 11.58% (11.64% benchmark).
• 5 years - 12.45% (12.53%).
• Since inception in May 2018 - 9.32% (9.41%). Quarterly distributions. 
• Top 5 holdings - CBA, BHP, CSL, NAB, WBC.
• Management fee - 0.04%.

5. VanEck MSCI International Quality ETF (QUAL)

Gives investors exposure to a diversified portfolio of the world's highest quality companies listed on exchanges in developed markets around the world, excluding Australia. Companies are included based on key fundamentals including high return on equity, earnings stability and low financial leverage.

Fund facts 
• Assets under management at August 11, 2025 - $7.46 billion.
• Benchmark - MSCI World ex Australia Quality Index.
Total returns to July 31, 2025
• 1 year - 8.13% (8.36% benchmark).
• 5 years - 15.68% (15.92%).
• Since inception in October 2014 - 15.82% (16.11%). Annual distributions. 
• Top 5 holdings - NVIDIA, Meta, Microsoft, Apple, Visa. 
• Management fee - 0.4%.

6. iShares Core S&P/ASX 200 ETF (IOZ) 

Gives investors low-cost access to the 200 largest companies listed on the ASX in a single fund.

Fund facts
• Funds under management August 11, 2025 - $7.39 billion. 
• Benchmark - S&P/ASX 200. Accumulation Index.
Total returns to June 30, 2024
• 1 year - 11.77% (11.81% benchmark).
• 5 years - 12.17% (12.26%).
• Since inception on December 6, 2010 -8.53 % (8.69%). Quarterly distributions. 
• Top 5 holdings - CBA, BHP, CSL, NAB, WBC.
• Management fee - 0.05%.

7. Betashares NASDAQ 100 ETF (NDQ)  

Invests in the top 100 companies listed on the NASDAQ. With its strong focus on technology, NDQ provides diversified exposure to a high-growth sector that is under-represented on the ASX.

Fund facts 
• Assets under management at August 11, 2025 - $6.89 billion.
• Benchmark - NASDAQ-100 Notional Net Total Return Index.
Total returns to July 31, 2025
• 1 year - 21.81% (benchmark 22.26%).
• 5 years - 19.08% (19.51%).
• Since inception in May 2015 - 20.09% (20.49 %). Half-yearly distributions.
• Top 5 holdings - NVIDIA Microsoft, Apple, Amazon, Broadcom.
• Management fee and expenses - 0.48%.

8. BSPDR S&P/ASX 200 Fund (STW) 

Was the first ETF to list in Australia and is designed to capture potential growth opportunities, dividends and franking credits offered by the 200 largest listed Australian companies.

Fund facts 
• Assets under management at August 11, 2025 - $6.15 billion.
• Benchmark - S&P/ASX 200 Index.
Total returns to July 31, 2025
• 1 year - 11.82% (11.81% benchmark).
• 5 years - 12.21% (12.26%).
• Since inception in August 2001 - 8.27% (8.54%). Quarterly distributions. 
• Top 5 holdings - CBA, BHP, CSL, NAB, WBC.
• Management fee - 0.05%.

9. Vanguard US Total Market Shares Index (VTS) 

Provides low-cost exposure to more than 3500 companies listed in the US, providing access to sectors under-represented in Australia, including technology and manufacturing.

Fund facts 
• Assets under management at August 11, 2025 - $5.85 billion.
• Index - CRSP US Total Market Index.
Total returns to July 31, 2025
• 1 year - 17.25% (benchmark 17.28%).
• 5 years - 17.62% (17.63%).
• Since inception in May 2009 - 15.84% (15.85%). Quarterly distributions. 
• Top 5 holdings - NVIDIA, Microsoft, Apple, Amazon, Alphabet.
• Management fee - 0.03%.

10. Vanguard Australian Shares High Yield ETF (VHY) 

Aims to provide low-cost exposure to ASX listed companies that have higher forecast dividends relative to other ASX-listed companies.

Fund facts 
• Assets under management at June 11, 2025 - $5.29 billion. 
• Benchmark - FTSE Australia High Dividend Yield Index. 
Total returns to July 31, 2025
• 1 year - 11.95% (12.13% benchmark).
• 5 years - 14.45%% (14.71%).
• Since inception in May 2011 - 9.42% (9.65%). Quarterly distributions. 
• Top 5 holdings - BHP, CBA, NAB, WBC, Telstra. 
• Management fee - 0.25%.

11. Vanguard MSCI International Shares (Hedged) ETF (VGAD) 

Gives investors exposure to many of the world's companies listed on the exchanges of major developed economies around the world. It's hedged to Australian dollars.

Fund facts 
• Assets under management at August 11, 2025 - $5.26 billion. 
• Benchmark - MSCI World ex-Australia (with net dividends reinvested), hedged into Australian dollars Index.
Total returns to July 31, 2025
• 1 year - 14.40% (14.42% benchmark).
• 5 years - 13.33% (13.29 %).
• Since inception in Nov 2014 - 10.52% (10.49%). Half-yearly distributions.
• Top 5 holdings - NVIDIA, Microsoft, Apple, Amazon, Alphabet.
• Management fee - 0.21%.

12. iShares Global 100 ETF (100 

Gives investors access to 100 of the largest global stocks in a single fund. Investors can use it to diversify internationally and seek long-term growth opportunities.

Fund facts 
• Assets under management at August 11, 2025 - $4.77 billion. 
• Benchmark - S&P Global 100 Index.
Total returns to July 31, 2025
• 1 year - 18.73% (19.10% benchmark).
• 5 years - 19.19% (19.46%).
• Since inception in Dec 2000 - 6.08% (6.13%). Half-yearly distributions. 
• Top 5 holdings - NVIDIA, Microsoft, Apple, Amazon, Broadcom. 
• Management fee - 0.40%.

13. Vanguard All-World Ex-US Shares Index ETF (VEU)  

Gives investors access to almost 4000 of the world's largest companies listed in developed and emerging countries outside the US. It offers low-cost access to a broadly diversified range of securities, industries, and economies. It's exposed to currency fluctuations as it's not hedged.

Fund facts 
• Assets under management at August 11, 2025 - $4.43 billion.
• Benchmark - FTSE All-World ex-US Shares Index.
Total returns to July 31, 2025
• 1 year - 15.46% (16.42% benchmark).
• 5 years - 11.68% (11.89%).
• Since inception on March 6, 2007 - 8.42% (na). Quarterly distributions. 
• Top 5 holdings - Taiwan Semiconductor Manufacturing, Tencent Holdings, Sap SE, ASML Holding NV, Samsung. Management fee - 0.04%.

14. Betashares Australian High Interest Cash ETFs (AAA)

Aims to provide attractive, regular income distributions and a high level of capital security via cash held in Australian dollar interest-bearing bank accounts.

Fund facts 
• Assets under management at August 11, 2025 - $4.17 billion.
• Benchmark - 30-day Bank Bill Swap Rate. 
Total returns to July 31, 2025
• 1 year - 4.38 % (4.17% benchmark).
• 5 years - 2.59% (2.39%).
• Since inception in March 2012 - 2.61% (2.20%). Monthly distributions.
• Current deposit accounts with Citibank, BOQ, Rabobank, MUFG Bank, NAB, J.P.Morgan Chase Bank, Bendigo Bank, Mizuho Bank, Sumitomo Mitsui Banking Corporation. 
• Management fee - 0.18%.

15. Betashares Global Sustainability Leaders ETF (ETHI) 

Holds a diversified portfolio of large, sustainable, ethical companies from a range of global locations. It combines positive climate leadership screens with a broad set of ESG criteria, offering investors a true-to-label ethical investment solution.

Fund facts
• Assets under management at Aug 11,2025- $3.59 billion 
• Benchmark - Nasdaq Future Global Sustainability Leaders Index
Total returns to July 31, 2025
• 1 year - 7.59% (7.99 % benchmark)
• 5 years - 14.42% (14.87%)
• Since inception in Jan 2017 16.81% (17.27%)
Half yearly distributions. 
• Top 5 holdings -Broadcom, NVIDIA, Mastercard, Home Depot, Visa
• Management fee and costs - 0.59% .

16. Vanguard Global Aggregate Bond Index (Hedged) ETF (VBND) 

Provides low-cost exposure to high-quality, income-generating securities issued by governments, government-owned entities, government-guaranteed entities, investment-grade corporate issues and securitised assets from around the world. Investments are predominantly rated BBB or higher by Standard & Poor's or equivalent ratings agency. The ETF is hedged to Australian dollars.

Fund facts
• Assets under management at August 11, 2025 - $3.41 billion.
• Benchmark - Bloomberg Global Aggregate Float-Adjusted and Scaled Index hedged into AUD.
Total returns to July 31, 2025
• 1 year - 2.97% (3.14% benchmark).
• 5 years - minus 1.56% (minus 1.43%). 
• Since inception in October 2017 - 0.79% (0.97%). Quarterly distributions.
• Top 5 issuers - US Treasury, Uniform Mbs, Govt of Japan, Rep of France, Rep of Italy. 
• Management fee - 0.20%.

17. Vanguard Australian Property Securities Index (VAP)

Provides a low-cost way to invest in a diversified blend of A-REITs with residential, office, retail, and industrial assets. The ETF offers potential long- term capital growth and tax-effective income that may include a tax-deferred component.

Fund facts 
• Assets under management at August 11, 2025 - $3.25 billion. 
• Benchmark - S&P/ASX 300 A-REIT Index.
Total returns to July 31, 2025
• 1 year - 9.83% (10.15% benchmark).
• 5 years - 12.80% (13.08%).
• Since inception in October 2010 - 10.26% (10.45%). Quarterly distributions.
• Top 5 holdings - Goodman, Scentre, Stockland, GPT Group, Vicinity.
• Management fee - 0.23%.

18. iShares Core Composite Bond ETF (IAF) 

Provides investors with low cost, diversified exposure to Australian investment grade fixed income securities. It suits investors with a medium risk/return profile who are seeking capital preservation and/or income distribution.

Fund facts 
• Assets under management August 11, 2025 - $3.18 billion.
• Benchmark - Bloomberg AusBond Composite 0+ Yr Index. 
Total returns to July 31, 2025
• 1 year - 5.14% (5.22% benchmark).
• 5 years - minus 0.31% (minus 0.18%).
• Since inception in March 2012 - 3.01% (3.17%). 
Quarterly distributions. 
• Top holdings - Commonwealth of Australia, Treasury Corporation of Victoria, NSW Treasury Corporation, QLD Treasury Corporation, WA Treasury Corporation.
• Management fee - 0.10%.

19. Vanguard Diversified High Growth Index ETF (VDHG)

A ready-made solution that invests in 90% growth assets (e.g. shares) and 10% defensive assets (e.g. bonds). Provides access to Vanguard's best investment thinking, in a ready-made portfolio that makes investing simple for you.

Fund facts 
• Assets under management at August 11, 2025 - $3.16 billion.
• Benchmark - High Growth Composite Index. 
Total returns to July 31, 2025
• 1 year - 13.13% (13.74% benchmark).
• 5 years - 11.91% (12.37%).
• Since inception in November 2017 - 9.67% (10.12%). Quarterly distributions. 
• Asset Allocation

• Australian shares: 36.1%
• International shares: 26.6%
• International shares hedged: 15.9%
• International small caps: 6.4%
• Australian fixed income: 3.0%
• International fixed income: 7.0%
• Management fee: 0.27%.

20. VanEck Vectors Equal Weight ETF (MVW) 

Gives investors exposure to a diversified portfolio of Australian equities in which all the holdings are equally weighted, reducing sector concentration.

Fund facts 
• Assets under management at August 11, 2025 - $3.16 billion. 
• Benchmark - MVIS Australia Equal Weight Index (MVMVWTRG).
Total returns to July 31, 2025
• 1 year - 12.58% (13.0% benchmark).
• 5 years - 11.90% (12.3%).
• Since inception in March 2014 - 9.59% (9.97%). Half-yearly distributions. 
• Top 5 holdings - Lynas Rare Earths, Origin Energy, Fortescue, SEEK, Ampol. 
• Management fee - 0.35%.

Last month, a new managed investment scheme titled 'iShares Bitcoin ETF' appeared on the ASIC Register, followed by the registration of a 'Trustee for iShares Bitcoin ETF' on the Australian Business Register.

BlackRock currently runs the iShares Bitcoin Trust ETF in the US, which houses over US$93 billion and has returned 82.67% since inception in January 2024. It has a 100% weighting in Bitcoin and charges a 0.25% management fee.

We understand BlackRock is looking to tap into the growing demand from Australian investors for dedicated products investing in Bitcoin.

Solutions Capital managing director and principal Dennis Mothoneos says that any launch of a digital asset-related product is always welcome - and the fact it'll be coming from a big name like BlackRock certainly doesn't hurt.

"A Bitcoin ETF means an adviser group and their investors can more easily access Bitcoin exposure through a brokerage account. There'll be fewer hurdles regarding cold wallets, warm wallets and private keys, allowing investors to be more readily build a position," Mothoneos says.

"In the way most financial advisers or wealth managers build portfolios through ETFs, the legal structure will fit even easier with the asset allocation framework, rather than a self-custody Bitcoin exposure. These are the clear advantages in regards to accessibility and convenience.

"And also, liquidity; it's tradable. An investor doesn't need to go through a crypto-focused exchange to trade. Many investors may be unfamiliar with those exchanges and may be concerned about how they're regulated."

While there are other similar ETFs available in the market, their underlying assets may be complex, including multiple digital currencies.

"If you start introducing other cryptocurrencies like Solana and others in a Bitcoin-focused ETF, it may be more difficult for people to adopt it," Mothoneos says.

"If a big institution is going to come to market it is best they start with a relatively simple product. The first step should be prioritising that adoption with a primary focus to make investors feel comfortable holding that ETF."

Investors will generally feel more secure investing via a reputable source, since it is an "unfamiliar" area for first-time investors, he noted.

"... for a regular investor or adviser in Australia, the crypto-native process of Bitcoin investing is probably just too unfamiliar. If you can access Bitcoin via the convenience of an ETF... that will make the asset more accessible," Mothoneos says.

This article first appeared on Financial Standard

Australians now have a record 388 exchange-traded funds (ETFs) to choose from, with total funds under management surging 37% in the past year to $272 billion.

The growth was fuelled by the 49 new ETF added on the ASX, according to the InvestSMART 2025 ETF Scorecard.

But while more choice is good news for investors, the gap between winners and losers is widening.

ETF winners: Bitcoin, games and gold

The standout was the DigitalX Bitcoin ETF (ASX: BTXX), up 95.5% over the year to June 30 on Bitcoin's rally.

Launched in July 2024, it's still a newcomer and, as InvestSMART notes, is yet to prove its long-term credentials.

Close behind was the Betashares Video Games and Esports ETF (ASX: GAME), up 90.3% as the gaming industry boomed.

Apart from a clever ticker code, GAME gives investors exposure to some of the industry's biggest names including Roblox and Nintendo.

"It also offers geographic diversity with holdings chiefly spread across the US, Japan and China," InvestSMART said.

Gold ETFs also dominated the top 10, as investors sought safe-haven assets during geopolitical and trade tensions.

ETF losers: Bears and short sellers

Bear-themed ETFs had a tough run.

The Betashares US Equities Strong Bear Complex ETF (ASX: BBUS) plunged 31.4%.

BBUS is designed to let investors profit from a decline in the US share market, something that has only happened in four of the past 20 years.

Other leveraged short funds - such as the Global X Ultra Short Nasdaq 100 Complex (ASX: SNAS) and Betashares Australian Equities Strong Bear Complex (ASX: BBOZ) - lost 27.4% and 20.6% respectively.

And it turns out tickers aren't everything: the Betashares Global Healthcare ETF (ASX: DRUG) was the fourth worst performer, falling 11.2%.

What ETF was the most popular?

Vanguard dominated the popularity stakes.

Its Australian Shares ETF (ASX: VAS) attracted $3.7 billion in new money, pushing its size past $20 billion.

Launched in 2009, it charges just 0.07%% in fees.

Vanguard's MSCI International ETF (ASX: VGS) came in second, giving investors exposure to 1,200 global companies including Apple, Nvidia and Amazon.

Betashares' Australia 200 ETF (ASX: A200) came in third.

At the other end, the Ardea Real Outcome Bond ETF (ASX: XARO) saw the largest outflow - $246 million - despite returning 4.5% over the year.

XARO invests in government bonds, aiming to deliver stable returns exceeding the cash rate and inflation.

While it returned 4.5% over the past year, the top performers among the Australian fixed income ETFs have delivered higher returns, often with lower fees.

Best performing ETF over five years

Over five years, the Global X FANG+ ETF led the pack with a 30.8% annualised return, turning $1000 into $3823.

"ETFs are changing how Australians invest," says InvestSMART CEO Ron Hodge.

"Even during those challenging periods, ETFs gave everyday investors the ability to stay invested, manage risk and keep their focus on long-term goals."

To view the full InvestSMART ETF Scorecard, click here.

It's not often a financial product can truly claim to have revolutionised our lives. But that's certainly the case with exchange traded funds.

Ten years ago, just 1.3% of Australians invested in exchange traded funds (ETFs), according to the ASX.

Fast forward to 2025, and one in five Australians own ETFs. These investors are reaping the rewards of low fees, high diversity and an ever-expanded choice of asset classes to invest in.

But the ETF revolution is about more than numbers.

With their low capital requirements, super-low fees, and built-in diversification, ETFs have made investing easier and more affordable.

Today, one in three young investors (average age 21) own ETFs. Over one in 10 ETF investors are women, and countless others are adding ETFs to their self-managed super fund.

Tim Bradbury, Head of Intermediary, Australia at State Street Investment Management,  which introduced ETFs to Australia in August 2001, sums up the impact, saying, "ETFs have brought Wall Street to Main Street."

Giving individual investors the same tools as the big end of town

Bradbury observes, "The incredible thing about ETFs is that they have allowed investors from all walks of life to access many of the same asset allocation tools and portfolio construction methods used by the large institutional investors.

"This has seen investors reap the rewards of choice, diversification and portfolio control - all at very low cost."

Rakesh Shah, principal of Perth-based wealth advisers, Capital Partners, explains the impact of ETFs saying, "Historically, investing for mum and dad investors typically meant buying individual stocks because managed funds were locked away behind premium platforms.

"Then along came ETFs, which are accessible to almost everyone, opening up a whole new market for retail investors. This ability to access new investment products at a time when the general public is getting educated on the power of index funds has improved investment outcomes for millions of Australians."

The upshot is that since the launch of State Street's ground-breaking series of ETFs in 2001, Australia's ETF market has surged to be worth $272 billion. Globally, the ETF market is valued at $US13.8 trillion as of December 31, 2024, according to Morningstar Direct.

The 'why' behind the rise of ETFs

Glen Hare, co-founder of Fox & Hare Financial Advice agrees that ETFs have "totally shaken up how everyday people invest".

Part of the appeal, he believes, is that ETFs have "made it super easy and affordable to spread your money across different investments and markets around the world, something that used to be a real pain."

This diversification is central to how ETFs work.

As a guide, one of the market giants - the $6 billion SPDR® S&P®/ASX 200 ETF, holds shares in over 200 listed companies, spanning 11 industry sectors from financials and materials through to health care, technology and real estate.  So, in a single fund holding, and potentially in just a single trade, an investor can gain low cost exposure to the broader Aussie share market.

Achieving the same level of diversification as a direct shareholder, would require significant capital, and quite likely involve paying substantial brokerage fees.

As Tim Bradbury observes, "Buying into just one or two ETFs offers wide exposure across a variety of underlying assets or markets, which investors can easily build on."

Bradbury points to other advantages that ETFs bring to a portfolio.

This includes the liquidity of being a listed fund, which allows investors to react to market events in real time.

ETFs are also very transparent. "ETF managers are required to disclose their investment holdings daily on their website, " Bradbury says. "This gives investors transparency into portfolio composition and risk exposure."

For many investors, it is the exceptionally low fees - the median expense ratio is around 0.44%  - that have seen ETFs form a core component of their portfolio.

Benefits beyond equity markets

While the early ETFs focused on shares, today's investors can pick from close to 400 ETFs listed on the ASX, with exposure to a whole spectrum of asset classes.

This is democratising access to once hard-to-access investments such as government bonds.

It is also letting investors take advantage of defensive strategies, such as allocating part of the portfolio to gold as a hedge against inflation or geopolitical risks.

Interestingly, State Street Investment Management's 2025-26 ETF Impact report reveals that investors believe ETFs are allowing them to be more innovative - something made possible through ETFs covering alternative asset classes such as commodities, private credit, hedge funds, infrastructure, and even cryptocurrencies.

Selecting the ETFs that are right for you

With so many ETFs to pick from, it can be hard narrowing down the choice.

Glen Hare says investors need to align the ETF's investment objective(s) with their own financial goals and risk tolerance.

He adds, "It is also crucial to meticulously assess the associated costs, including the investment fee and potential brokerage fees, as these can significantly impact long term returns."

As smaller providers come onto the market, Tim Bradbury recommends looking at the brand name, track record, and the size of the fund and fund provider. Larger ETFs can exploit economies of scale to lower their fees. And, as Rakesh Shah adds, a fund with smaller assets under management could be at risk of closing down.

What lies ahead

Over the almost quarter-century since their launch in Australia, ETFs have consistently showcased their growth and innovation. And this is expected to continue.

As Tim Bradbury observes, "Markets are never predictable - and never will be. But if there's one lesson investors have learned over the years, it's that adaptability and flexibility matter.

"ETFs have expanded and evolved to become valuable tools that help investors to create and build wealth through being able to capitalise on opportunities, manage risks and optimise portfolio construction - all at very low cost."

It is these qualities that could see ETFs play a key role in your portfolio.

Important disclosure: Issued by State Street Global Advisors, Australia Services Limited (AFSL Number 274900, ABN 16 108 671 441). Investing involves risk including the risk of loss of principal. You should seek professional advice and consider the product disclosure statement and target market determination, available at www.ssga.com/au, before deciding whether to acquire or continue to hold units in an ETF.

I know this because my 12-year-old has just requested them and he's pretty good at anticipating future trends.

It's no surprise because he loves computer games, which are pretty much the modern equivalent of the Choose Your Own Adventure series.

The books subvert the theory that the author guides the reader through a series of adventures in a particular order.

Instead, the adventure is determined by the choices made by the reader as they advance through the book.

While they make the best choices they can, the results can be disastrous or wonderful.

They just don't know with any certainty.

Investing uncertainty

It's the same with investing!

Up until the past few years, many Australians invested in actively managed unit trusts.

Buying an actively managed fund was a lot like finding an old Wilbur Smith novel in a summer rental and spending two days on the back deck hunting lions and fighting mercenaries.

Every month, or every quarter, the portfolio manager writes an update describing the adventures they had with investors' money.

Sometimes it was a good adventure (they made money) and sometimes they had a bad adventure (they lost money).

The rise of ETFs

Over time investors became disheartened with both the adventures, the result and the cost.

The current iteration of the investors' Choose Your Own Adventure is in the field of exchange traded funds (ETFs). With ETFs, investors can choose their own investing adventure.

And they can play it however they like: fast and loose, cheap and cheerful, slow and steady. There's something for everyone.

Just consider the ETFs on offer.

In 2024, 49 products were added to the ETF market in Australia. Three of these were geared, offering around two times the potential returns of the underlying product. That's also two times the volatility and two times the potential loss.

Three of them were for investing in cryptocurrencies, offering a way for the crypto-curious to whet their appetite in the field without signing up for a crypto exchange or having a crypto wallet.

Many were equities products based on some smart beta concept, such as equal weighted, value, growth, momentum and quality.

A lot of the returns in popular active products come from these factors (I have tested it). Investors have realised they can have the same factors in their own portfolios but at a third of the cost or less.

New kids on the block

Some were what I call 'smart product' products.

These are products that incorporate derivatives so that the outcome (mainly income) is more defined. Investors are paying a modest fee (compared with actively managed funds) for the intellectual property of the manager.

Investors in ETFs can also manage their own cash. Actively managed unit trusts often hold non-trivial allocations to cash, for both market timing and liquidity purposes.

Unfortunately, they charge the full fee on cash held and when markets are rising there's an obvious cash performance drag.

If an investor is on the younger side with fairly limited responsibilities, ETFs can provide a low-cost, high-gain investing adventure.

There are geared funds, crypto funds, factor-style funds. Sure, there are risks but, by and large, investing is a sum positive game (unlike gambling, which is sum negative).

Controlling the cost

For the investor with responsibilities, and by that I mean people who have  families or are investing for their future self - those following the FIRE (financial independence, retire early) trend or those just wanting to retire like a normal person - there are also adventures aplenty, but more controlled. Preparation is still a key for these people.

The first thing to understand is cost. ETFs might be cheaper than actively managed funds, but cost is still important.

Fundamentally, you need to know the ongoing management fees and what the trading costs are. Some ETF managers - specifically Vanguard and Betashares - have their own investment platforms where investors can invest with no brokerage and for as little as $200. Start early enough and $200 a month builds to something meaningful.

Rising popularity

How popular are these approaches?

Well, recent research that I conducted showed that Vanguard had the highest sustainability of monthly net flows of all the ETF managers. It might not be the proverbial smoking gun, but it is pointing in the right direction.

The Betashares platform hasn't been going two years yet so it's difficult to determine what impact this has had on its net flows, but I'm hopeful. Anything that makes it easier and cheaper to invest is alright by me.

Last year I did a deep dive on the cheapest products in the ETF market. What I found was that an investor could create their own balanced portfolio for as little as 0.1% a year. This gets 
a basic portfolio of equities, fixed interest and cash in a 60/30/10 configuration.

If people wanted to implement some of their specific investor objectives, such as a desire for income-focused share funds or products with factor styles (value, growth, equal weighted and stuff such as that), a portfolio could be had for less than 0.4%.

Choose Your Own Adventure

That's what I mean by being able to choose your own investing adventure.

You can control the costs to suit yourself. You can control the risks (subject to the normal investment adventures that come from systemic risk) and you will come to understand the consequences of decisions.

In the end, the person who chooses their own investing adventure will be a changed person.

They will have had adventures, hopefully they will be better off financially, they will have learned from both their successes and their failures, and they will have looked after the people they hold most dear. What more can anyone ask?

While it's helpful for chocolate treats, it's even more critical when investing.

Recent market volatility, sparked by Trump's renewed tariff threats, highlights how unpredictable markets can be.

Just like you wouldn't risk your Easter eggs in one basket, it's essential not to place all your money into one asset. Diversification is key to reducing risk and ensuring your portfolio is prepared for all market conditions.

In the world of investing, diversification means spreading your money across different assets, sectors, and regions to reduce risk.

If one egg cracks, you've still got others to fall back on. When it comes to diversifying, exchange traded funds (ETFs) are a brilliant tool that provides access in investment portfolios.

Building a diversified portfolio with ETFs

ETFs work much like a well-stocked Easter basket, offering exposure to a variety of assets.

When you buy an ETF, you're buying a basket of investments, from shares and bonds to commodities.

Instead of focusing on one stock or sector, ETFs help you spread your risk across multiple investments.

For example, if you invest in an Australian shares ETF, you gain access to hundreds of companies across various industries. If one sector underperforms, others might still perform well, helping to cushion the impact.

ETFs also provide easy access to international markets. It makes sense not to rely on just one country when investing, as countries often go through different sea changes of outperformance.

This global diversification helps protect against the risks of being overly exposed to one economy.

ETFs make it easy to invest globally, whether it's the US, Europe, or emerging markets like China.

This kind of global mix can help smooth out bumps when one market falls behind. For example, while US shares have struggled this year, Europe and China have done better, and ETFs let you tap into that with just one click of the button.

Gaining exposure to a range of asset classes

One of the major benefits of ETFs is their ability to provide exposure to multiple types of investments.

There's more to investing than just shares. For instance, bond ETFs let you invest in government or corporate bonds, providing stability and income, while commodity ETFs give you access to precious metals like gold.

Adding different asset classes to a portfolio strengthens diversification because they don't always move in the same direction - a concept known as correlation. Gold is a classic example of an asset that has a low correlation to shares, as it often rises when shares fall.

So far this year, while many global share markets have dipped into bear market territory (meaning a fall of over 20%), gold has hit record highs as investors seek safety during times of uncertainty.

Having stocks, bonds and commodities in your portfolio ensures that you're not reliant on one asset class alone, just like balancing your Easter basket with a range of different chocolate eggs and non-chocolate treats too.

ETFs also allow you to manage risk while still taking advantage of potential growth. Whether the market is up or down, a diversified portfolio built with ETFs will be more resilient than a single investment.

In times of uncertainty, ETFs can serve as the safety net your portfolio needs, just like the Easter bunny hiding a few extra eggs for good measure.

The benefits of ETFs: Liquidity and cost-effectiveness

Much like how chocolate eggs are easy to share around with loved ones, ETFs are incredibly liquid, meaning you can buy and sell them easily on the stock exchange.

This flexibility gives you control over your investments, whether you want to take advantage of market movements or need access to cash quickly to top up those easter treats.

Unlike traditional managed funds, which are only priced once a day, ETFs are traded throughout the day, allowing you to get accurate real-time pricing.

Another sweet advantage of ETFs? Low fees. Unlike traditional managed funds, which generally have higher costs, ETFs are more affordable, meaning more of your returns stay in your basket.

Think of high fees like termites nibbling away at your nest egg, while ETFs let your investments grow without as many bites taken out. Over time, those savings add up.

Investing for what really matters

As you savour your Easter chocolates, it's a timely reminder that variety isn't just sweet, it's smart.

Just like a well-filled Easter basket has a mix of treats, a strong investment portfolio needs a healthy spread across asset classes, sectors, and regions.

Diversification helps soften the bumps when markets get rocky, and ETFs make it easier than ever to access that mix without the extra cost or complexity.

Putting all your eggs in one basket might work in the short-term, but over the long-run, it's a risky strategy.

Diversification is often called the only free lunch in investing, and for good reason. It helps smooth the ride, manage risk, and set you up for more consistent returns over time.

Smart investing is not about chasing the next shiny easter egg. It's about building a portfolio that can handle all market conditions.

Ultimately, the goal isn't just aiming for higher returns, it's freedom.

The freedom to enjoy Easter lunch without checking the markets because you know your portfolio has you covered. The freedom to spend more time with the people who matter, doing what you love, for as long as you like.

This week on the Friends With Money podcast, Money's Tom Watson is joined by Marc Jocum, senior investment strategist at Global X ETFs, to dig into cryptocurrency exchange traded funds and what they are all about. They discuss:

• Crypto ETFs versus buying directly
• The crypto assets available through ETFs
• How crypto ETFs actually work
• The recent performance of cryptocurrency
• What the future could hold for crypto ETFs

Listen to this episode of Friends With Money

Listen on Apple Podcasts

Listen on Spotify

Watch on YouTube for closed captions

Subscribe to Friends With Money

Subscribe wherever you get your podcasts

Friends With Money podcast FAQ

What is the Friends With Money podcast?

Friends With Money is a weekly personal finance podcast by Money magazine, offering expert insights on investing, budgeting, superannuation, property, and other money strategies for everyday Australians.

Where can I listen to the podcast?

You can listen on Apple Podcasts, Spotify, or YouTube (with closed captions available).

Who hosts Friends With Money?

Episodes are hosted by Vanessa Walker and Tom Watson from Money magazine, featuring expert guests and real conversations about money.

Is the podcast suitable for beginners?

Yes! It's designed to be accessible for beginners while still offering valuable insights for seasoned investors.

What topics does the podcast cover?

The Friends With Money podcast covers topics including banking, property, budgeting, superannuation, investing, saving, insurance, employment, travel and more.

How often are new episodes released?

New episodes are released weekly, so you can stay up to date with the latest financial tips and trends.

Can I watch episodes with captions?

Yes, full episodes with closed captions are available on YouTube.

Why subscribe to the Friends With Money podcast?

Boost your financial literacy anytime, anywhere with the Friends With Money podcast from Money magazine. Whether you're commuting, working out, or relaxing at home, this weekly podcast makes it easy to grow your money knowledge on the go.

Each episode dives into real conversations about money - how it's earned, shared, saved, and grown - with tips and insights that make finance simple and relatable. Perfect for beginners and seasoned investors alike, it's your go-to guide for building better financial habits.

Subscribe to the Friends With Money podcast today and start learning when it suits you.

What we have seen from ETF providers in the past is pretty much what we expect from them in the future.

But there is one ETF provider that has broken with its past patterns and the result is, in my view, a game changer.

Wise decisions

Let me explain.

On a recent weekend, I was driving around the streets of Melbourne delivering kids to parties and sports, and trying to get home before the summer heat peaked for the day.

It was then I heard someone say something profound on Radio National.

National security expert Professor Zachary Shore (don't worry, I'd never heard of him either) was speaking on ABC Radio's Big Ideas program (also available as a podcast). Shore has spent his life studying and writing about how governments and other institutions make wise decisions.

One such decision was the Marshall Plan. Most people with any familiarity with the Marshall Plan agree that it was one of the most important and beneficial foreign aid programs of the 20th century, simultaneously bringing Europe out of deep poverty after World War II and acting as a bulwark against Russian aggression during the Cold War.

What is less known is that it replaced another program, the Morgenthau Plan. This was a proposal to weaken Germany after the war by destroying its industrial base and preventing it from re-arming.

Although the Morgenthau Plan still had vociferous advocates, it was recognised it would lead to mass starvation and more conflict within Europe. In other words, the Marshall Plan was the complete opposite of the Morgenthau Plan in deed and intent.

But the Marshall Plan would not have been possible without the Morgenthau Plan and the reaction against the suffering it would cause.

The ETF industry

Now, readers might be wondering what this has to do with the Australian ETF industry.

My latest ETF research article is an analysis of the growth rates of the major players - Vanguard, BlackRock, Betashares, Van Eck, Global X and State Street - for the 12 months to September 2024.

I nearly left State Street out of the analysis.

Besides being the 'original gangsta' of Australian ETFs - the first ETFs to list were the SPDR S&P/ASX 50 Fund (ASX: SFY) and SPDR S&P/ASX 200 Fund (STW) back in 2001 - it had been losing market share consistently over the years due to higher costs (similar products were falling rapidly in price) and probably lack of innovation.

To me, it was a classic example of rent-seeking behaviour.

Having built what was a large asset base, State Street was more concerned with maintaining its revenue stream for as long as possible, even as it declined in absolute terms, rather than competing for new dollars on issues that mattered to new investors: generic products based on market capitalisation indexes and innovation for smart products at the right price.

One thing that kept existing investors as clients was the rise in the Australian sharemarket. This was a disincentive for investors to sell because of potential capital gains tax liabilities.

But I decided to have a look at State Street anyway. After all, it was still the fifth largest ETF provider in the country.

Measures of growth

One of the measures I used as a proxy for growth was estimated revenue. While all the other managers had positive revenue growth ranging from 15% for BlackRock to 37% for Van Eck, State Street's revenue had fallen by 33% despite a 20% increase in assets under management.

Another measure I used was asset growth from net flows. In the case of State Street, the growth from net flows accounted for about 1% of asset growth, compared with 19% growth from financial market gains.

How did that happen?

This sent me back to look at the management fees of their products in the past 12 months. I was amazed to see that 12 out of 17 products had fee reductions in the past 12 months, ranging from 30% to 62%.

If these fee reductions had occurred at the beginning of the year instead of at various times through the year, the reduction in revenue would have been much greater than the 33% I calculated.

One of the things Shore said in his interview was that the people who were best at reading the intentions of others did so not just by scrutinising past behaviour but by scrutinising behaviour at pattern break points.

In other words, missing out on the natural growth from the Australian ETF market was causing more pain than the benefits of pursuing rent-seeking behaviour.

Break in behaviour

The fee reductions were a significant break in their behaviour (despite periodic but modest fee reductions in the past).

For investors looking for a market that has both size and competition, this is good news. It means that State Street is back in the business of providing ETFs to Australian investors.

I have only once said that something was a game changer in relationship to the Australian ETF market, and that was the launch of the Betashares Australia 200 ETF with a management fee of 0.04%pa. It is now a $6 billion-plus product.

My hope is that these fee reductions on State Street products are another game changer. State Street is the third largest ETF provider in the US.

It can't afford to let the Australian market be its one failure point.

My prediction is that it is about to launch a bunch of new products that draw on both its huge intellectual capital and the success of its products in the US market. The beneficiaries will be the investors of Australia.

In this episode of the Friends With Money podcast, Money's Michelle Baltazar sits down in the studio with deputy head of investments and capital markets at VanEck, Jamie Hannah, to discuss how best to capitalise on the ETFs in your portfolio.

• How to invest in exchange traded funds (ETFs)
• What are some of the popular ETFs
• Managing and withdrawing your profits
• Tax and bookkeeping

Listen to this episode of Friends With Money

Listen on Apple Podcasts

Listen on Spotify

Watch on YouTube for closed captions

Subscribe to Friends With Money

Subscribe wherever you get your podcasts

Friends With Money podcast FAQ

What is the Friends With Money podcast?

Friends With Money is a weekly personal finance podcast by Money magazine, offering expert insights on investing, budgeting, superannuation, property, and other money strategies for everyday Australians.

Where can I listen to the podcast?

You can listen on Apple Podcasts, Spotify, or YouTube (with closed captions available).

Who hosts Friends With Money?

Episodes are hosted by Vanessa Walker and Tom Watson from Money magazine, featuring expert guests and real conversations about money.

Is the podcast suitable for beginners?

Yes! It's designed to be accessible for beginners while still offering valuable insights for seasoned investors.

What topics does the podcast cover?

The Friends With Money podcast covers topics including banking, property, budgeting, superannuation, investing, saving, insurance, employment, travel and more.

How often are new episodes released?

New episodes are released weekly, so you can stay up to date with the latest financial tips and trends.

Can I watch episodes with captions?

Yes, full episodes with closed captions are available on YouTube.

Why subscribe to the Friends With Money podcast?

Boost your financial literacy anytime, anywhere with the Friends With Money podcast from Money magazine. Whether you're commuting, working out, or relaxing at home, this weekly podcast makes it easy to grow your money knowledge on the go.

Each episode dives into real conversations about money - how it's earned, shared, saved, and grown - with tips and insights that make finance simple and relatable. Perfect for beginners and seasoned investors alike, it's your go-to guide for building better financial habits.

Subscribe to the Friends With Money podcast today and start learning when it suits you.

VanEck Australia has been named Money's Best Fixed Interest Exchange Traded Funds as part of the Best of the Best awards.

• Find out how we chose the winners
• Order your copy of the bumper awards issue
• Check out more from Best of the Best 2025

It's been a tough few years for fixed interest. After experiencing one of the worst periods in decades during the pandemic, the asset class won back investors who were searching for higher yields as central banks began lifting interest rates.

Part of this rejuvenated interest has been evident in the billions of dollars that Australian investors have poured into fixed-income exchange traded funds (ETFs) over the past few years through providers such as VanEck Australia.

"We are delighted that VanEck Australia and our Floating Rate ETF (ASX: FLOT) have been recognised in Money's 2025 Best of the Best Awards," says Arian Neiron, chief executive and managing director of VanEck Asia Pacific. "It is satisfying that FLOT has helped so many Australians over the past rate-hiking cycle and we are honoured to receive the award."

While it isn't typically the dominant part of many portfolios, investors may benefit from the income generation that an allocation to fixed income can provide, not to mention the inverse relationship it often has with shares, which can help reduce volatility.

Neiron makes the case that investors wanting exposure to fixed-income assets such as bonds have traditionally encountered barriers - barriers which, he says, ETFs have helped break down.

"Bonds, particularly bonds issued by governments or companies overseas, can be difficult for everyday investors to access and there is generally a high minimum investment. ETFs have made it much easier to access bonds from across the globe," he says.

"Bond ETFs invest in various fixed-income securities such as corporate or government bonds and provide a low-cost way to access the bond market. In addition, one of the benefits of investing in bonds via an ETF is that it enables investors to get exposure to a diversified portfolio of bonds in a single trade."

Beyond the sphere of fixed income, Neiron says VanEck will maintain its track record of innovation in the ETF space as investor interest continues to grow.

"As the Australian ETF market rapidly expands, VanEck has been the first to offer many innovative investment solutions, with full transparency. Many of our funds have been first of 
their kind on the ASX, most recently our Bitcoin and global defence ETFs."

Vanguard has been named Money's Best ETF Manager as part of the Best of the Best awards.

• Find out how we chose the winners
• Order your copy of the bumper awards issue
• Check out more from Best of the Best 2025

More than 1.5 million Australians, or roughly 20% of all on-exchange investors in the country, held at least one exchange traded fund in their portfolio in 2023, according to the Australian Stock Exchange's latest Australian Investor Study.

It's a type of investment that only appears to be getting more popular in Australia as the years go by, but one provider that has been there from the very beginning is this year's Best ETF Manager award winner, Vanguard Australia.

"Vanguard pioneered index funds nearly 50 years ago, which later became the launching pad for the global ETF industry," says Adam DeSanctis, Vanguard's head of ETF capital markets for the Asia-Pacific region.

"Our stated mission has always been to take a stand for all investors, to treat them fairly and to give them the best chance for investment success. It's in our DNA. Behind this is our low-cost investing philosophy, which enables investors to keep more of their total returns."

That philosophy appears to be working, given that a number of Vanguard's ETFs currently rank among the most popular in Australia with investors - at least when it comes to funds under management.

Speaking to the popularity of ETFs more broadly, though, DeSanctis says the diversification that they can provide to portfolios and their relatively low cost are among the major driving factors.

"The biggest motivations among investors using ETFs are their ability to provide broad diversification across investment markets and the fact that they are so easy to access on the stock exchange.

"But beyond that, more and more investors are seeing ETFs as the quickest and lowest-cost way to access different types of asset classes and a wide range of offshore markets."

Vanguard's success this year comes on the back of consistently strong performances across the various ETF award categories, including Australian and international shares, ESG, income and fixed interest.

"We are honoured to have been recognised as the winner of the prestigious 2025 Money magazine Best of the Best Award in the Best ETF Manager category," says DeSanctis.

"It reflects the trust that the industry has in us and we look forward to continuing to help investors achieve their goals via our low-cost ETFs."

Exchange traded funds have quickly become the investment vehicle of choice for millions of Australians, he says.

"With over 50 million customers worldwide, Vanguard's long-term buy-and-hold investment approach using broadly diversified, low-cost funds continues to resonate with everyday investors seeking to build their wealth."

Betashares has been named Money's Best Australian Shares Exchange Traded Funds as part of the Best of the Best awards.

• Find out how we chose the winners
• Order your copy of the bumper awards issue
• Check out more from Best of the Best 2025

A sizeable chunk of Australian investors continue to see value in Australian companies, with the results from the ASX's most recent Australian Investor Survey indicating that 58% of them hold local shares and 20% hold exchange traded funds (ETFs).

Louis Crous, chief investment officer at Betashares, says that even with extensive access to global markets, many Australian investors still choose to prioritise local equities - a growing number of whom are using ETFs to get that exposure.

"The broader Australian market is characterised by larger and more mature companies that return attractive levels of dividends and associated franking credits, and as a result the Australian market is one of the highest-yielding developed markets in the word.

"Similar to the ETF offerings on international markets, Australians can also access ETFs that provide investment exposure to specific sectors or strategies within the Australian market, for example the technology sector or high-quality companies.

"Such exposures allow investors to construct Australian equity portfolios or express particular views on the Australian equity market in a convenient and cost-effective way."

It's fair to say that the Australian ETF market is one that Betashares knows better than most and, importantly for its clients, that extends to its ability to deliver competitive returns.

That's evidenced by the fact that Betashares has taken out the award in this category once again this year, thanks in part to another strong performance from its Australia 200 ETF.

"We're honoured to received recognition in the Best of the Best Awards again this year," says Crous. "Money plays an important role in educating Australians about achieving financial goals and we're proud to receive recognition again this year."

With more than 100 funds on offer and more than $40 billion in assets under management, Betashares has become one of the largest players in the Australian ETF landscape in recent years - no easy feat in such a competitive market.

Crous says Betashares has been able to achieve this through a combination of innovation and attending to its investors' wealth-creation goals.

"At Betashares, we have a very strong focus on the specific needs of the Australian investor. This not only includes product design and structure, but also the range of investment solutions.

Moreover, both innovation and investor education are important components of our business and something we take very seriously as we strive to enable every Australian to achieve financial progress."

Australian investors continue to be attracted to ETFs as a cost-effective and convenient investment vehicle, he says.

"ETFs offer a range of benefits including transparency, convenience and diversification, and more investors are recognising these benefits and seeking to add them to their portfolio. As a result, there is an ongoing shift away from typically higher-cost unlisted active funds to ETFs."

Correction: An earlier version of this story listed the SPDR S&P/ASX 200 Fund management fee as 0.13%. The correct fee is 0.05%.

Roughly 1.5 million people now hold ETFs within their investment portfolios, according to the 2023 Australian Investor Study produced by the Australian Stock Exchange (ASX). That's about a fifth of the total 7.7 million on-exchange investors in Australia.

And the market is booming. Separate research from the ASX found that the Australian ETF market has experienced a 20-fold increase in size over the past decade, with over $200 billion worth of funds currently under management.

So what is it about exchange traded funds that has resonated so much with Australian investors? How do they actually work? And which are the best ETFs in Australia in terms of returns? For those curious to learn more, let's dive into some of the key questions surrounding ETFs.

What are ETFs?

Exchange traded funds trade on the stock market in much the same way as equities, like shares in a company. Generally, they are designed to track the performance of a particular index (e.g. the S&P 500), thematic (e.g. technology companies) or commodity (e.g. gold).

To achieve this, investor money is pooled together to purchase cash, shares, bonds or listed property trusts - whatever assets the ETF is investing in. These underlying assets are then held by a trustee on behalf of unit holders.

Investors get a distribution every financial year of dividends (less expenses) and capital gains from the underlying investments.

Pros and cons of ETFs

Australians who are looking to add ETFs to their portfolios will want to be aware of the advantages and disadvantages that can come with investing in these funds. Here are a few worth thinking about:

Pros: 

• Diversification: Unlike buying into a single company, ETFs allow investors to purchase a basket of shares or bonds which can offer exposure to an index or broader sector of the market.
• Cost: Because they tend to be passively managed, ETFs typically come with lower fees than managed funds. 
• Access: Just like shares, ETFs are generally listed on exchanges like the ASX which makes them relatively easy to buy and sell.
• Transparency: Investors can get a good sense of what they're buying with an ETF, as most ETFs publicly list their underlying holdings.

Cons:

• Risk: Like any investment, ETFs do come with a level of risk attached. For example, the kind of price fluctuations that any asset is susceptible to.
• Dividend yields: While it's not always the case, ETFs can deliver lower dividend yields. For example, dividend-focused ETFs may not always beat the market.

Of course, there are plenty more factors to consider. Those interested can learn more about the benefits and risks of ETFs with the help of Moneysmart's useful guide.

What factors have driven the success of ETFs?

Given the uptake in the number of Australians taking on exchange traded funds in recent years, not to mention the growth in the industry itself, there are clearly a number of factors attracting investors to ETFs both at home and abroad.

For Marc Jocum, product and investment strategist at Global X ETFs, the combination of the ongoing enthusiasm for low-cost investing, greater options across asset classes and increased ETF adoption among financial advisors have all contributed to the uptick.

"Investors can access a range of asset classes for a fraction of the cost of what they normally would have to pay in a traditional managed fund, so because the average ETF is over half the cost of an unlisted active fund, you're seeing a lot more movement going into low cost vehicles," he says.

"Another reason is the different products that have become available within the ETF landscape which weren't always easily accessible elsewhere. Last year was a great example where investors were exploring asset classes like bonds and fixed income, and that helped bring more money into ETFs."

What are the most popular ETFs in Australia? 

ETFs tend to ebb and flow in popularity over time, but recently, Australian investors appear to have been focused on both international equities and Australian equites, according to research from Global X.

In the 12 months to the end of September 2024, ETFs focusing on global shares attracted $13.2 billion worth of inflows, while those focused on Australian shares raked in $6.9 billion in inflows.

Unsurprisingly then, low-cost funds holding the top companies listed on the ASX and global indices were among the favourites for investors over the past year - at least, based on the volume of net inflows that each fund received.

It's a been a relatively similar story over the long-term as well, with many of the same exchange traded funds sitting at the top of the list of ASX-listed ETFs by total funds under management.

Which Australian ETFs have the highest returns?

Popularity is one thing, but how about performance? While investors may be wise to heed the adage about past performance not being indicative of future returns, they may be curious to know about the best ETFs in Australia by way of performance over the last year.

Again, according to an analysis from Global X ETFs, funds focusing on cryptocurrency as a theme or with large holdings in the technology sector have delivered some of the highest returns over the 12 months to the end of September.

How to compare ETFs

With hundreds of different options to choose from on Australian exchanges alone, the first step that investors may want to take is narrowing down their list of possible ETFs based on their risk appetite, investment needs and investing timeframe.

Perhaps a fund which tracks the largest 300 companies on the ASX will be best ETF option? Or an ETF composed of bonds? Or one which focuses on the world's largest healthcare companies?

Once they've narrowed their focus, investors may find that they're left with a handful of similar options from different ETF providers. After all, there are plenty of players to choose from, including the likes of BlackRock, Vanguard, BetaShares, VanEck, Global X and more.

So how else can relatively comparable funds be separated? At this point, investors may want to compare their options based on factors like the underlying assets being held in each fund, the management fees being charged and how dividends are approached by each provider.

How can Australians invest in ETFs?

Australian investors who are looking for the best way to purchase ETFs, or to gain exposure to them in their investment portfolios, have a few options available to them:

1. Brokers

Many investors now use online brokers like CommSec and CMC Markets to purchase equites and ETFs through Australian exchanges like the ASX and CBOE, or even international exchanges. In most cases users will be charged a brokerage fee for each trade they place (e.g. $10), plus they may need to meet a minimum trade value (e.g. $500).

2. ETF providers

ETF issuers like Betashares and Vanguard also have their own investment platforms through which investors can purchase units in ETFs. The former doesn't charge any brokerage on ETF trades, while the latter charges $9 brokerage to sell ETFs, but not to buy them. In both cases, investments are not CHESS-sponsored, but are held by a custodian.

3. Micro-investing platforms

Investors looking to get exposure to ETFs can also use micro-investing platforms like Pearler Micro or Raiz. The benefit of these platforms is that the threshold to invest is usually much lower than online brokers, though there are typically fewer funds to invest in and assets are typically held by a custodian.

For more on exchange traded funds, as well as additional information on other investment options, assets classes, investment styles and how to approach areas like diversification and establishing a risk profile, head on over to the Money investing hub to get started.

This week on the Friends With Money podcast, Money's Tom Watson is joined by founder and chief executive of Stockspot, Chris Brycki, to dig into thematic exchange traded funds and the role they can play in portfolios. They discuss:

• What thematic ETFs actually are
• The thematic ETF versus index ETF approach
• Tech and sustainability as themes and the ETFs on offer
• How technology and sustainable ETFs have performed
• The risks of jumping on trendy thematic ETFs

Listen to this episode of Friends With Money

Listen on Apple Podcasts

Listen on Spotify

Watch on YouTube for closed captions

Subscribe to Friends With Money

Subscribe wherever you get your podcasts

Friends With Money podcast FAQ

What is the Friends With Money podcast?

Friends With Money is a weekly personal finance podcast by Money magazine, offering expert insights on investing, budgeting, superannuation, property, and other money strategies for everyday Australians.

Where can I listen to the podcast?

You can listen on Apple Podcasts, Spotify, or YouTube (with closed captions available).

Who hosts Friends With Money?

Episodes are hosted by Vanessa Walker and Tom Watson from Money magazine, featuring expert guests and real conversations about money.

Is the podcast suitable for beginners?

Yes! It's designed to be accessible for beginners while still offering valuable insights for seasoned investors.

What topics does the podcast cover?

The Friends With Money podcast covers topics including banking, property, budgeting, superannuation, investing, saving, insurance, employment, travel and more.

How often are new episodes released?

New episodes are released weekly, so you can stay up to date with the latest financial tips and trends.

Can I watch episodes with captions?

Yes, full episodes with closed captions are available on YouTube.

Why subscribe to the Friends With Money podcast?

Boost your financial literacy anytime, anywhere with the Friends With Money podcast from Money magazine. Whether you're commuting, working out, or relaxing at home, this weekly podcast makes it easy to grow your money knowledge on the go.

Each episode dives into real conversations about money - how it's earned, shared, saved, and grown - with tips and insights that make finance simple and relatable. Perfect for beginners and seasoned investors alike, it's your go-to guide for building better financial habits.

Subscribe to the Friends With Money podcast today and start learning when it suits you.

My mother, who is 64, does not work and has no income. She recently bought a small retirement unit in western Sydney with cash. She will move into the unit and she intends to rent out our family home and live off the rental income.

Let's say the home is worth $1 million and she can get a net rental income of about $50,000 a year to live on.

Would she be better off selling the home and putting the $1 million into a high-dividend exchange traded fund (ETF) that pays around 5% or dropping the $1 million into superannuation and living off the super income (she currently has a very low super balance)? - Eric

This is a complex question, Eric. It involves a serious mix of tax and investment strategies and your mum's views on retaining the home or selling it and reinvesting the money. A lot of the answer will lie in your mum's 'sleep at night' test.

Frankly, a well-located property or a diversified portfolio of quality shares is not likely to generate vastly different returns. So, I need you and your mum to work out the issues that come down to personal preference. I can help you a little by making some general observations.

Clearly, holding the property as a rental will be far more labour intensive than holding a diversified ETF. There will be all the usual issues with tenants and maintenance, ensuring records are accurate for tax purposes and insuring the property.

From a tax viewpoint, you and your mum will need to talk to your accountant.

Questions you need answered are things such as:

• Will your mum have to pay land tax?
• Can she qualify for the 'six-year absence' rule and maintain the home as her family residence?
• What are the capital gains tax consequences if the home is rented and treated as an investment property? 

The answer to which is the best - property or shares - is not an easy to answer.

A lot depends on the location of the family home - for example, is it in an area near a station that may be rezoned. This could multiply its value.

It is easy to argue that, broadly speaking, in your mum's shoes, I'd prefer shares to the family home. As you know, long-term returns have been excellent. You can spread your risk in a diversified ETF very cheaply.

An ETF does not give you problems with maintenance or blocked toilets. I like the passive approach, preferring to spend my time on family, friends, travel and sport, not managing a property.

But others will argue that property is a much better asset for them. I absolutely respect that view. Many people like to drive past their tangible asset rather than just look at electronic records saying they own an ETF.

I don't see this as a return-based argument. Both options should be fine over the long term. I'd seek the tax advice you need and take that into consideration, but the heart of this issue is personal preference.

Take the value of Bitcoin as one example. In early June 2016, one Bitcoin was trading for around $820. At roughly the same time in 2020, that had gone up to $13,800. Fast-forward to 2024 and the price is hovering over $100,000.

Of course, there have been plenty of dips along the way.

As Hebe Chen, a market analyst for the brokerage IG Australia, explains, the potentially significant ups and downs are a factor that investors will need to take into account.

"Cryptocurrency markets are well-known for their high volatility, which can be sweet candy for some investors but poison for others. Understanding and strictly assessing your risk tolerance is the first and most crucial step before diving into the world of crypto," she says.

While many earlier investors had to purchase cryptocurrency through a brokerage platform, the various options for prospective investors only seem to be growing and growing.

"Australian investors have a number of avenues to get involved with the crypto world and related technology, including direct ownership, which involves buying and holding various digital currencies on reputable cryptocurrency exchange platforms," says Chen.

"Then there's investing in listed companies on the ASX or any global indices that are involved in blockchain or technology crypto-related businesses.

"And some managed funds and ETFs offer exposure to cryptocurrency or blockchain technology as a key component of their portfolio."

And a recent decision in the US is likely to pave the way for even more crypto-related ETF options for Australian investors.

In January, the US Securities and Exchange Commission approved the listing and trading of 11 spot Bitcoin exchange traded products from the likes of Blackrock and Fidelity. Then, in May, the SEC also paved the way for the approval of similar Ethereum products.

Despite these approvals, SEC chair Gary Gensler warned investors to "remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto".

In essence, a spot Bitcoin ETF or ETP is designed to reflect the price of Bitcoin.

The fund will generally hold actual Bitcoins as the underlying security and issue shares in the fund to investors like a regular ETF, making it a relatively accessible way for investors to get exposure to Bitcoin.

Since their inception earlier in the year, the funds have collectively attracted billions of dollars from investors.

"The approval of spot Bitcoin ETFs early this year, coupled with their demonstrated popularity, marks the dawn of cryptocurrency's maturity 
as a mainstream investment tool," says Chen.

"It's also foreseeable that the debut of spot Ethereum ETFs in the near future will only reinforce this shift and propel major cryptocurrencies into an ever-growing number of investment portfolios. Either the evolving maturity or the surging demand will likely lead to the birth of Australian-listed ETFs."

Exchange traded fund market capitalisation jumped by 15.7% in the first half of 2024 to $205.3 billion.

ETF flows ($11 billion) were also strong, more than double the $4.8 billion of net flows received in the first half of 2023.

At the same time, Morningstar data shows that local unlisted funds had outflows of $3.8 billion over the same period.

International and Australian equities were the preferred asset classes for investors, with net inflows of $5.6 billion and $3.3 billion, respectively.

Fixed income, which led last year, came in third with $1.8 billion in net inflows.

"There's been a shift so far since the end of 2023 as investors and their financial advisers return to international and Australian equities as market sentiment improves," says Alex Vynokur, Betashares chief executive.

"We expect this trend to continue to drive flows into these two asset classes, alongside fixed income."

Meanwhile, product development activity was high this half, with 36 new products launched, compared to 22 in the first half of 2023. This included four new issuers, all active ETF providers.

Nevertheless, active ETFs saw cumulative net outflows, mainly due to large withdrawals from one Magellan ETF.

"The Australian ETF industry continues to expand as the growing range of ETFs is allowing investors and their financial advisers to use the convenient and cost-effective investment vehicle across more parts of their portfolio, while the shift away from typically higher cost unlisted funds to ETFs is helping to reduce costs across investor portfolios," Vynokur says.

According to a new report released by ETF provider Global X, cryptocurrency ETFs, including those for Bitcoin and Ethereum, have been the top performers over the past year, driven by risk-on sentiment pushing prices higher.

"Global demand for bitcoin ETFs has surged, with over $30 billion in net inflows since the debut of US spot bitcoin ETFs. Companies exposed to artificial intelligence, especially in the semiconductor sector, have also shown strong performance."

Conversely, Global X noted that renewable energy ETFs have continued their weak performance into 2024, making them the worst performers over the past year.

"Despite the ongoing focus on net-zero targets, companies in this sector have faced challenges from higher borrowing costs and inflationary pressures.

"Inverse ETFs also suffered, losing over a third of their value in the past 12 months due to the strong rise in markets reaching all-time highs."

This article first appeared on Financial Standard

This latest fee reduction follows two fee decreases introduced this time last year for the Vanguard Australian Fixed Income Index ETF (VAF) and the Vanguard Australian Shares Index ETF (VAS).

Management fees for VAF fell from 0.15% to 0.10%, while fees for VAS fell from 0.10 to 0.07% per annum.

Vanguard Australia head of product offer Curt Jacques says keeping costs low is an important way Vanguard helps investors achieve their goals.

"Vanguard is focused on delivering value to investors through lower fees, high quality experience and best-in-class investment management," Jacques says.

Vanguard says it has delivered more than 40 fee reductions for Australian investors in the past decade across a range of products and services.

"This fee change may be good news for investors seeking to move out of cash holdings to capture low cost, durable, resilient yields, with the potential for additional price appreciation as rates eventually decline," Jacques says.

"Following the Reserve Bank of Australia keeping rates on hold last week and removing their tightening bias, our outlook for bonds remains positive and we expect interest rates to ultimately settle at levels above those in recent memory."

This article first appeared on Financial Standard

Sadly, I have seen many of these schemes in my decades in the industry. So why do people fall for these scams?

Let me share the main reasons why and two key things you can do to avoid a Ponzi scheme so that you or your loved ones never have to experience this.

Before we dive in, it's important to understand why people are attracted to these scams.

No doubt you've heard the saying, 'If it's too good to be true, then it probably is?' Never has a more accurate statement been said when it comes to Ponzi schemes.

I believe the main reason people get caught in these investments is because they have no way of measuring what is too good to be true.

How much is too much? With every Ponzi scheme, the story is the same way in that we're told we can make very good returns.

But what they really hear is that they will make a lot of money in no time with very little effort, which we know sounds too good to be true.

What happens next is that the person getting scammed makes no effort to stress test the investment through proper research or due diligence. Instead, they focus on how much they'll make and ignore the risks.

This is usually because they are asked to participate by people they trust, which could be the person running the Ponzi scheme or a friend or family member who has already invested.

As a consequence, they drop their guard because they're told they need to be quick, so they don't 'miss out'.

If you aren't willing to do the research to pick apart the opportunity presented or you have FOMO, then, unfortunately, you might just be the type of person who could fall for a Ponzi scheme.

So, what are the two ways to avoid them?

Firstly, and most importantly, check that the business is registered with the Australian Securities and Investments Commission (ASIC).

You should also request the company's Australian Business Number (ABN) or Australian Company Number (ACN) for further verification. You also need to verify their claims independently and question unusually high returns.

Secondly, seek out an independent expert like an accountant or financial planner and let them look at the opportunity. If they smell something fishy, do not invest. You need to pay attention to the warning signs that it's too good to be true.

If you suspect fraudulent activity or believe you have fallen victim to a Ponzi scheme, then report it to ASIC or the Australian Competition and Consumer watchdog.

What are the best and worst-performing sectors this week?

The best-performing sectors include Materials up more than 3%, followed by Energy up more than two% and Financials up more than one%.

The worst-performing sectors include Healthcare down just under one%, followed by Consumer Staples and Utilities, which are both down under 1%.

The best-performing stocks in the ASX top 100 include Bellevue Gold, which is up more than 18%, followed by Ampol Limited and A2 Milk, which are both up more than 6%.

The worst-performing stocks include Medibank Private and NIB Holdings, which are down just under 4% followed by Lendlease Group which is down just more than 3%.

What's next for the Australian stock market?

This week the All-ordinaries index is up more than 1% with the buyers stepping in at the 7900 level to take the index higher.

Remember, last week, I mentioned that 7900 was a potential reversal point and while the buyers have agreed so far, I would like to see a continued push upward to break above the all-time high of last week.

If this occurs, I can confirm the All-Ordinaries index has formed the short-term low I have been anticipating, and that the market will continue rising up to the 8200 to 8400 point range in the near term.

I have also spoken about setting yourself up for the next opportunity to buy following the short-term pullback, so this week let's look at some sectors that held up well and are set to benefit from the next move up on our market.

The Materials and Energy sectors have stood out, posting some of their biggest weekly gains last week.

Bear in mind that the market also recorded its biggest one-week fall for 2024 last week.

Right now, it's clear that money has been flowing into these two sectors while the market was falling, which tells me that if you are looking for good value, these are the sectors to focus on.

Some notable names in the Materials and Energy sectors that have the potential to do well in the next month or so include Woodside Energy Group, Santos, RIO, BHP and Fortescue Metals.

For example, the US share market hit new highs in recent weeks, propelled by surging technology companies such as Microsoft, Alphabet, Amazon and Nvidia, which are all listed on the Nasdaq.

In addition to the so-called Magnificent Seven, other companies listed on the Nasdaq are enjoying huge earnings growth as they embrace AI and other technologies.

The Nasdaq exchange has become the listing place of choice for the most innovative technology companies globally - including all of the members of the US' "Magnificent Seven"- due to its reputation.

Some notable examples of companies that have chosen the Nasdaq to list their businesses include Australia's own Atlassian, global semiconductor leader ASML based in the Netherlands, and Latin America's online marketplace giant, Mercado Libre.

For Australian investors, gaining exposure to these leading companies can be critical to improving portfolio diversification and adding growth potential.

The Australia equity market is largely made up of mature large capitalisation companies from cyclical industries.

Looking at the makeup of the S&P/ASX 200 over 50% of the index is in the financials and materials sectors with just 2% in technology stocks. While this has catered to Australian investors' preference for dividends, there is a trade off with exposures offering more growth potential.

By contrast the flagship Nasdaq 100 Index is made up of more than 50% technology companies, 15% communication services, and 13% in consumer discretionary - all sectors that are underrepresented in Australia.

Nasdaq's appeal to large innovative technology companies makes it a very compelling complement to Australian investors' portfolios to improve both diversification and growth.

While the ASX200 has returned on average 8% p.a. over the past 10 years the Nasdaq 100 Index (in Australian dollar terms) has returned on average 22% p.a.

For investors, it has never been easier to invest in different parts of the Nasdaq.

It's expected that investors will continue to gravitate to the flagship Nasdaq 100 index via the Nasdaq 100 ETF (ASX: NDQ) or its currency hedged equivalent (ASX: HNDQ).

However, investors now have more options to add exposure to other parts of the Nasdaq universe to diversify their portfolios.

For example, the quickly rising stars that comprise the 100 largest Nasdaq non-financial companies outside the Nasdaq-100 Index have the potential to become tomorrow's leaders.

Examples of leading companies that jumped graduated from the Nasdaq Next Generation 100 Index to the Nasdaq-100 include Tesla and Netflix. Investors can look to add exposure to this part of the Nasdaq index via the Betashares Nasdaq Next Gen 100 ETF (ASX: JNDQ).

Investors might look to use this exposure as a more satellite allocation of their portfolio, perhaps where an investor might look for growth.

Additionally, investors can now access the same 100 companies in the Nasdaq 100 index but weighted so that each company has the same weight on each rebalance.

This means instead of the largest companies having a bigger weight in the index each company in the 100 will represent approximately 1% of the portfolio.

Investors may be interested in this approach to further improve diversification across the breadth of innovative companies in the index and can access this exposure via the Betashares Nasdaq 100 Equal Weight ETF (ASX: QNDQ).

Overall, its important that investors look to build a well-rounded portfolio, of which the innovative companies associated with the Nasdaq can play a meaningful role.

This week on the Friends With Money podcast, Money's Tom Watson is joined by Cameron Gleeson, senior investment strategist at Betashares, to chat about the performance of the ETF market in 2023 and look forward to the trends emerging in 2024.

• What's driven the appetite for ETFs in the last decade?
• What made fixed-income ETFs so appealing last year?
• What are the most popular ETFs on the market?
• Which ETFs were the best performers in 2023?
• Are there any ETF trends worth keeping an eye on in 2024?

Listen to this episode of Friends With Money

Listen on Apple Podcasts

Listen on Spotify

Watch on YouTube for closed captions

Subscribe to Friends With Money

Subscribe wherever you get your podcasts

Friends With Money podcast FAQ

What is the Friends With Money podcast?

Friends With Money is a weekly personal finance podcast by Money magazine, offering expert insights on investing, budgeting, superannuation, property, and other money strategies for everyday Australians.

Where can I listen to the podcast?

You can listen on Apple Podcasts, Spotify, or YouTube (with closed captions available).

Who hosts Friends With Money?

Episodes are hosted by Vanessa Walker and Tom Watson from Money magazine, featuring expert guests and real conversations about money.

Is the podcast suitable for beginners?

Yes! It's designed to be accessible for beginners while still offering valuable insights for seasoned investors.

What topics does the podcast cover?

The Friends With Money podcast covers topics including banking, property, budgeting, superannuation, investing, saving, insurance, employment, travel and more.

How often are new episodes released?

New episodes are released weekly, so you can stay up to date with the latest financial tips and trends.

Can I watch episodes with captions?

Yes, full episodes with closed captions are available on YouTube.

Why subscribe to the Friends With Money podcast?

Boost your financial literacy anytime, anywhere with the Friends With Money podcast from Money magazine. Whether you're commuting, working out, or relaxing at home, this weekly podcast makes it easy to grow your money knowledge on the go.

Each episode dives into real conversations about money - how it's earned, shared, saved, and grown - with tips and insights that make finance simple and relatable. Perfect for beginners and seasoned investors alike, it's your go-to guide for building better financial habits.

Subscribe to the Friends With Money podcast today and start learning when it suits you.

Global exposure and diversification are the talk of the town. But not, it would seem, among all the nation's 600,000-plus self-managed super funds (SMSFs).

The Australian Taxation Office (ATO) publishes quarterly data on SMSF asset allocations. The latest figures (June 2023) confirm that the $876 billion invested in SMSFs is heavily concentrated in just two asset classes: cash ($147 billion) and Australian shares ($260 billion).

Together, these two asset classes account for close to half of all SMSF assets.

Even within their sharemarket holdings, SMSFs tend to focus on a limited number of names. A report by the SMSF software company Class shows that BHP and Woodside Energy are the two most commonly held stocks, favoured by almost one in two SMSFs.

Along with the resources sector, SMSFs also gravitate to financial stocks. The top 10 shareholdings are dominated by Westpac (held by 41% of SMSFs), CommBank (39%), NAB (39%), ANZ (38%) and Macquarie Group (28%).

This can be a red flag for SMSF trustees.

James Kingston is head of wealth solutions and insights, Australasia, at BlackRock, which manages the iShares suite of exchange traded funds (ETFs). "A high concentration in individual stocks can be rewarding, but it can also carry significant risks," he says.

"Individual stock returns can constantly fluctuate. An investor's risk appetite and time horizon - that is, how long they want to invest for - will determine whether they can withstand this volatility."

One strategy to help manage volatility is to invest in multi-asset ETFs.

Core of a portfolio

Just as ETFs have surged in popularity among individual investors who are attracted to their low-cost diversification, the ATO data confirms SMSF holdings in listed funds have jumped 70% over the past five years.

Broadly speaking, ETFs can focus on one, or many, asset classes.

"Single-asset class ETFs provide exposure to a particular asset class, such as stocks or bonds," says Kingston. "They can cover a broad range of sectors and geographies by tracking the performance of a representative index, such as the S&P/ASX 200 for Australian stocks."

However, for time-poor trustees, or those who aren't confident about selecting investments, Kingston says a multi-asset ETF can be used to form the core of the SMSF's portfolio.

"A multi-asset ETF, such as the iShares Balanced ESG ETF (ASX: IBAL), provides exposure to multiple asset classes, each with different characteristics. The benefit is that if one asset class performs negatively, the other asset classes within the ETF can potentially cushion some of those losses."

Multi-asset ETFs can also allow SMSFs to tap into hard-to-access asset classes, such as bonds, which can provide an element of capital stability.

As a guide, the iShares Balanced ESG ETF has a portfolio evenly allocated between global equities (50%) and global fixed income (50%). "In a single trade, investors can tap into more than 7000 stocks and bonds spanning nine regions across the globe," says Kingston.

"For investors with a moderate risk tolerance, who are seeking a balance between capital preservation and growth, a multi-asset ETF, such as IBAL, may offer additional ballast to their SMSF in terms of stabilising portfolio volatility and risk, and preserving future income."

Global markets in the mix

ATO data also reveals a surprising homegrown bias among SMSF investments. Just $14 billion is collectively held in overseas shares, a tiny fraction of the $260 billion allocated to Australian stocks.

"Having a high concentration of risk in a particular market is akin to putting all your eggs in one basket," cautions Kingston.

"It not only means losing out on winning markets, it also means losing the opportunity to offset losses occurring in one market, for example Australia, when other markets might be faring better.

"Global diversification through a multi-asset ETF helps investors navigate fast-changing markets around the world and stay the course 
to pursue their financial goals."

Another BlackRock fund - the iShares High Growth ESG ETF (ASX: IGRO) - features a globally diversified high-growth portfolio, with 90% invested in global equities and the remaining 10% in global fixed income.

It is a blend that has been thoughtfully put together by the BlackRock team.

"Within the equities sleeve, 56% is allocated to international equities and 34% is in Australian equities," says Kingston.

"Similar to the IBAL ETF, it has more than 7000 stocks across more than nine global borders - all in one single trade."

A key point of difference is the higher growth tilt of the iShares High Growth ESG ETF. There is still an exposure to bonds, although smaller, and this broad diversification allows SMSFs to potentially lower volatility and risk, yet still seek high returns.

According to Kingston, the balanced product could be more suited to investors seeking capital growth with a medium risk-return profile, while the high-growth version is worth a look by investors seeking capital growth with a medium to high risk-return profile.

Both the iShares ETFs pay distributions quarterly, which makes them a source of regular income for SMSF members in the drawdown phase.

According to Betashares' latest Australian ETF Review, the industry saw 33% growth year-on-year.

It recorded its highest annual funds under management increase in 2023, growing by $43.7 billion, with $15.0 billion in new inflows. This is compared to $13.5 billion in net inflows in 2022.

Record ETF launches in 2023

What's more, 2023 was the biggest year on record for product launches, with 56 new ETFs launched on Australian exchanges, up from 51 the year prior.

"In what is certainly an accelerating trend, a large proportion of the new launches in 2023 were active ETFs (46 or 26 funds) with the majority of these launches being via the creation of traded classes of existing unlisted funds, which we call conversions," says Betashares chief commercial officer Ilan Israelstam.

There are now 94 active ETFs trading on Australian exchanges with a total of about $35 billion of funds under management (FUM).

However, Israelstam says most of these assets come from existing FUM that has been 'converted' to the exchange via the 'open class' structure, with only $9.5 billion currently held on CHESS.

"We expect continued growth of this category, but to date, we haven't seen true widespread adoption 'on exchange' of ETFs," Israelstam noted.

Most popular ETFs

When it comes to product categories, the report stated fixed income ETFs were most favoured by investors, with  net inflows of $5.3 billion, up from $3.6 billion in 2022.

Australian shares ETFs were the second most popular category with $5.2 billion in flows, compared to $4.4 billion in 2022, and international equities followed with $2.9 billion of net inflows versus $3.3 billion in 2022.

Israelstam says since the launch of the Australian ETF industry in 2001, cumulative net flows in the Australian unlisted managed funds industry are now negative.

"This clear investor preference for ETFs, plus the increasing 'conversion' activity we're seeing of unlisted managed funds into active ETFs, represents a significant 'changing of the guard' in the Australian asset management industry," he says.

Future of ETFs

Looking to the future, Israelstam says the industry will continue to benefit from increased investor adoption and inflows combined with positive markets.

"As such, we forecast total industry FUM at end 2024 to exceed $200 billion and could reach as high as $220 billion depending on market conditions," he says.

This article first appeared on Financial Standard

The SEC approved 11 Bitcoin ETF applications from major institutional investment players such as BlackRock, Fidelity, Invesco, VanEck, Ark Investments, and Grayscale, opening the door for Australian retail investors and financial advisers to access US listed bitcoin spot ETFs through local brokerages.

Betashares head of digital assets Justin Arzadon says the SEC's decision to approve spot bitcoin ETFs from a range of fund managers is a watershed day for the maturity of bitcoin.

"The SEC's approval of spot bitcoin ETFs should add further confidence to the digital asset ecosystem and could pave the way for Wall Street to move deeper into cryptocurrencies as an asset class," he says.

"The move to approve a spot bitcoin ETF will finally provide US-based investors with an option to invest in bitcoin via a familiar ETF structure."

Magnet Capital co-founder and director Egor Sidelska described the SEC's decision as the most "influential even in Bitcoin's history", highlighting it as the culmination of a decade-long wait for official institutional adoption.

Sidelska noted that the absence of listed products has made it challenging for wealth managers to allocate funds to crypto. However, with the SEC approval, Australians can now access a spot Bitcoin ETF legally and compliantly, rather than through futures, cash-settled products, or trading derivatives.

Global X senior product and investment strategist David Tuckwell noted that the SEC's move to list Bitcoin ETFs on regulated exchanges thus allows advisers "the kingmakers of the ETF market" to purchase them, opening up the cryptocurrency market to a key segment.

Nevertheless, SEC chair Gary Gensler emphasised that the approval of Bitcoin ETFs shouldn't be viewed as an endorsement of other crypto assets or the broader cryptocurrency market.

He clarified that this decision also doesn't reflect the SEC's stance on the legal status of other crypto assets or the existing non-compliance issues among some market participants.

Meanwhile, SEC commissioner Caroline Crenshaw expressed strong dissent, labelling the regulator's decision as "unsound and ahistorical".

"I am concerned that these products will flood the markets and land squarely in the retirement accounts of US households who can least afford to lose their savings to the fraud and manipulation that appears prevalent in the spot bitcoin markets and will impact the ETPs," she said.

This article first appeared on Financial Standard

The fund manager's new platform - BetaShares Direct - offers an "AutoPilot" feature, streamlining the process of setting up recurring investments, investing in professionally constructed diversified portfolios, and building bespoke custom ETF portfolios.

BetaShares Direct also provides investors access to the fund manager's investment insights and educational resources, empowering them to make informed decisions for wealth creation.

The platform opens for early access today with its initial features; however, Betashares plans to "significantly expand" its functionality with an array of additional tools and features aimed at helping self-directed investors meet their financial goals.

"The initial launch features of Betashares Direct will be joined by a growing range of tools and functionality that will allow investors at all stages of their investment journey to build robust and well-constructed portfolios," says Betashares chief executive Alek Vynokur.

He says the company is "actively exploring" the development of adviser-specific features, including a referral program to link investors with more complex needs to advisers, which "will be added" in the future.

Betashares is actively engaging with advisers, seeking their feedback on the referral program, and gaining insights into which features would be most valuable to their practices.

The platform, developed in-house by Betashares engineering and product teams, aims to make the investment process as effortless as possible. It offers streamlined, personalised performance and tax reporting, thereby simplifying the administration and management of investments.

The launch of Betashares Direct follows the recent announcement of the group's agreement to acquire Bendigo and Adelaide Bank's superannuation business. Betashares views these moves as synergistic elements in its long-term strategy to broaden its reach within the financial services sector.

A Betashares spokesperson told Money sister publication, Financial Standard, that the immediate priority for its superannuation plans involves finalising the transaction and obtaining necessary regulatory approvals.

However, in the longer term, the company aims to explore opportunities to enhance the Direct platform's functionality, enabling engagement with customers throughout their wealth creation journey.

Betashares also indicated that it has "no desire" to move into the full-service adviser platform space.

"Our functionality is built around ETFs and ETF portfolios and is targeted at clients with simple financial needs. As such we have no immediate plans to consider the more complex features currently offered by full-service platforms," the spokesperson says.

Betashares says it "invested heavily" in the technology and product capabilities of the platform, including significant headcount being added to its team.

"The launch of Betashares Direct is another important milestone for us. We are proud to bring genuine innovation and choice to Australian investors, assisting them in making informed investment decisions and helping them reach their wealth creation goals," Vynokur says.

This article first appeared on Financial Standard

The biggest beneficiaries have been semi-conductor companies, led by Nvidia, but many other companies could benefit as more organisations turn to AI to speed up operations and boost productivity.

Nvidia is now the fifth largest company in the US, having recently overtaken Berkshire Hathaway and Tesla after surpassing Meta last year.

It is now closing in on Amazon with a market capitalisation of around US$1 trillion after its share price surpassed US$400 in May.

If it overtakes Amazon, that would make Nvidia the fourth-largest company in the US despite it being still relatively unknown outside tech circles. But that is changing.

While AI has existed for years, the launch of ChatGPT has accelerated its move into the mainstream.

We are now seeing the first inklings of impact beyond process automation in the enterprise to true disruption across multiple fields. Big tech names like Microsoft, up around 41% YTD and Nvidia, up around 196% YTD, have been the obvious winners in the AI market so far. Google too is launching its own AI applications and is up around 34% YTD.

However, there is likely to be a wide array of winners from this emerging technology, from the chip makers powering AI, the big tech companies building the software and the long chain of companies benefiting from the implementation of AI.

One thing that's clear is that generative AI has the potential to be a powerful tool for businesses and individuals, and that it will likely play an increasingly important role in a wide range of industries in the future.

With the speed at which the market is accelerating, a core question is arising for investors: are investors overpaying for a technology that could fade away in the months or years to come?

Well, according to estimates, the revenue potential and monetisation of this market hasn't even begun, with expectations of rapidly growing revenue growth, as the chart below shows.

With that mind, we look at which sectors are likely to benefit most from AI, which we have divided into three main groups: semiconductors, big tech, and robotics and automation companies.

Semiconductors

Some of the bigger winners of the AI trade so far have been in hardware, as mentioned with computer chip maker Nvidia, one of the best performing stocks in the S&P 500 this year. Also known as semiconductors, computer chips enable AI applications; Large Language Model's (LLM) rely heavily on computer chips or semiconductors to train AI using large textual datasets.

The growing sophistication of AI and new multitasking capabilities mean that graphics processing units (GPUs) such as those made by Nvidia are becoming increasingly important over Central Processing Units (CPUs) which are common in laptops. The demand for GPUs will likely accelerate as AI applications grow increasingly sophisticated.

Nvidia has been the most visual winner so far of the generative AI trend, but many other companies in the semiconductor supply chain are benefiting too from the increased demand; ASML, which specialises in the development and manufacturing of photolithography machines used to make computer chips, is up 34% YTD.

Chip-maker Broadcom is up 58% YTD while AMD is up 81% and Taiwan Semiconductor Manufacturing Company has rallied 28%. The Global X Semiconductor ETF (SEMI) allows investors to capture the winners of the AI revolution across a diversified portfolio. SEMI has returned 50% YTD.

Big tech

Computer chip aside, companies developing AI apps are being led by mega-caps like Microsoft with its OpenAI collaboration and Google with its internally developed Bard. We are seeing 52-week highs for the big technology stocks such as Apple, Meta, and Google owner Alphabet as the AI theme push them higher.

These FAANG mega-caps are keeping the broader markets like the S&P 500 index, accounting for around 90% of the index's gains this year.

Yet despite the leaps and bounds in AI, revenue from this theme only accounts for a small part of Microsoft and Google's income streams, highlighting potential for revenue from these services to grow to levels seen in spaces such as cloud services.

The revenue will start to show up in areas like search and office packages as these firms integrate AI to further the stickiness of their ecosystems.

Providing exposure to big technology companies, the Global X FANG+ ETF has returned 77% YTD, significantly outperforming the broader Nasdaq 100 and S&P 500 indices.

Robotics and automation

The robotics, automation, and artificial Intelligence (RAAI) industry is another obvious winner of the advancements in AI. There are many secondary beneficiaries in the RAAI space which are using AI to advance existing technologies. Some recent examples of development in the area include ABB Robotics launching its Robotic Item Picker, a new vision-based solution that accurately detects and picks items in warehouses and fulfillment centres.

The private enterprise Boston Dynamics has partnered with AI-software company Levatas to integrate OpenAI's ChatGPT into Boston Dynamics' robo-dog, Spot. With ChatGPT and Google Assistant's voice technology, Spot can understand and converse with humans. Meanwhile, Intuitive Surgical (27% YTD and near 52 weeks highs) are talking to AI and Machine Learning (from their two decades and 10 million procedures) to enhance surgeons' abilities across their key Da Vinci device.

For a low cost, there are several ways investors can play AI themes with ETFs; these ETFs provide diversified exposure to a long-term theme that is likely to keep gaining in importance, pushing up the value of technology companies that are enabling the AI revolution.

The fee change will be effective from July 3 and follows a periodic review of Vanguard's pricing and funds.

"At Vanguard we regularly assess our product offer against our commitment to deliver low-cost, high-quality products that are best in class," it said.

At the end of May, VAS returned 8.02% p.a. on a 10-year period.

"We aim to continue to enhance our product offer in line with this goal. This robust review process includes a pricing review of our funds with the aim of passing on any savings to investors where possible," Vanguard said.

In the last decade, Vanguard said it's delivered over 40 fee reductions across its product range, including the most recent reduction for its Australian Fixed Income ETF (VAF).

In April, it reduced managements costs for the VAF from 0.15% to 0.10% p.a. citing its ongoing commitment to bring down costs.

"As an across-the-board low-cost fund provider, keeping costs low has been an important way that Vanguard has helped investors achieve financial goals and we continue to deliver this benefit to our investors globally," it commented.

"We are committed to gradually reducing management fees as our range of broadly diversified funds and ETFs grow in scale."

This article first appeared on Financial Standard

Around 1.9 million Australians are investing in ETFs, up 6% from the year before. ETFs listed on the ASX attracted $13.5 billion of inflows in 2022, but asset declines caused by falling share and bond markets meant the ETF market size dropped by 2.7%. Globally, a massive $1.24 trillion poured into ETFs.

In contrast, unlisted actively managed funds in Australia had one of their worst years in 2022 as investors took out $26.6 billion.

Active ETFs were also unpopular with Australian investors. The typically higher investment management fees charged by active ETFs ate into returns and the manager's claimed ability to beat markets by handpicking securities often failed to materialise

By choosing broad-based index ETFs, investors get the benefit of low fees, less tax liabilities than a managed fund, a broadly diversified portfolio in one security, lower risk and trading flexibility.

"Several factors, such as oil prices, inflation, interest rates and central bank policy, geopolitical tensions and protectionism are currently influencing markets," says Chris Brycki, founder and CEO of Stockspot, an online, robo advice group that builds portfolios for investors using ETFs.

Brycki points out that nobody knows how these factors will pan out for markets into the future.

"It's all the more reason to own a diversified portfolio that can perform in different economic regimes and stick with an automated strategy for rebalancing," he says.

"It pays to remind yourself of the bigger picture when markets are down. While corrections can be stressful, our advice to clients has always been to stick to your diversified strategy, stay invested and perhaps top up if you have the cash reserves."

Brycki says research shows that fewer and fewer active funds can outperform simple index funds consistently over time.

While the Australian ETF market reached $133 billion at the end of 2022, spread among 319 funds, it still has a long way to go to reach the US. ETFs make up about 4% of the total funds market in Australia compared with around 25% in the US.

The Australian equities ETF category had the highest inflows, with $4.4 billion last year, not quite as strong as the $5.5 billion in 2021.

With crashing markets, defensive sectors did well as investors, particularly retirees, capitalised on higher yields from bonds. Fixed income was in demand, attracting the second largest inflows with $3.6 billion, up from $2.9 billion in 2021.

With global markets in disarray, investors placed around a third of what they had invested the year before, with $3.3 billion in international ETFs.

Yet despite investors selling active ETFs, providers launched 17 new active funds last year, making up a third of the 52 new ETFs listed on the ASX, a record number of launches.

"This trend is particularly striking given the large number of active ETF launches, with the actual flow activity seemingly not dissuading managers from launching active ETF classes of their unlisted funds," says Ilan Israelstam, chief commercial officer at BetaShares.

The range and number of ETFs is making choosing the most appropriate product challenging for some investors. You can now buy ETFs that are multi-sector funds for peppercorn fees. Or lots of exotica, such as thematic funds that invest in artificial intelligence and robotics or cybersecurity or healthcare biotechnology. You can also buy into numerous global ETFs that invest in a wide variety of countries, sectors and regions.

The worst performer in 2022 was the BetaShares Crypto Innovators ETF. It might have appeared a winner when it was launched at the end of 2021, and it briefly rose 11%, but by the end of 2022 it had lost 82%. Other poor performers had large exposures to technology companies.

The two most popular ETFs are broad-based Vanguard funds.

The Australian Share Index ETF, known by its sharemarket ticker VAS, attracted $11 billion last year. It tracks the shares in the S&P/ASX 300 for a flat fee of 0.10%. Second was the MSCI Index International Shares ETF (VGS), which tracks the MSCI World ex-Australia Index (with net dividends reinvested and hedged to the  Australian dollar) for a fee of 0.18%. Investors put more than $4 billion in the ETF.

Vanguard also offers four diversified ETFs that have pre-mixed asset classes such as local and international shares as well as fixed income, small companies and emerging markets. The funds suit different long-term risk and reward factors, including conservative, balanced, growth and high growth.

How to select the right ETF for you

• Check long-term performance 
Focus on picking ETFs with a track record over multiple years, not the short term.

• Monitor the liquidity. 
Look at the daily volume traded and how liquid the underlying holdings are. Larger and more liquid markets generally have a lower bid/ask spread, meaning lower transactional costs.

• Analyse the investments.
What are the underlying holdings, exposure and allocation? Most ETFs track an underlying index, so check the index methodology to understand how the holdings, exposure and allocation are chosen.

• Factor in fees.
What are the costs of the ETF? How do these compare? Typically, expensive ETFs often relate to active fund managers or complex underlying strategies that include leverage, synthetic instruments and inverse products. These come with higher risks.

• Be sceptical of the marketing. 
ETF issuers market new products heavily, so investors need to analyse the timeframe and whether fees or tax are included, and how the new product compares with existing products.

Low cost, diversification and convenience are attracting a new generation of investors to an ever-growing universe of ETFs, and BlackRock has been named Money's Best ETF Manager for 2023.

BlackRock's ETFs have attracted a staggering 120 million investors worldwide. The most popular ETFs with investors in 2022 have been cash and low-duration fixed-income products, says Jason Collins, head of iShares and index investment at BlackRock Australasia.

"With inflation going up, the cash and cash-like ETFs have been providing a return in line with rising cash rates," explains Collins. "US Treasury ETFs have attracted really strong flows this year, for example."

BlackRock, a pioneer ETF provider with its iShares range, wins this year's best ETF manager award. It offers investors a full smorgasbord of investments with 40 ETFs covering such areas as global equity, global fixed income, factors, ESG, thematics and complete multi-asset portfolios.

Since BlackRock launched its first iShares ETF in Australia in 2007, it has grown to manage $24 billion of investors' money.

Collins says the Australian ETF market hasn't grown as strongly as it has in some other parts of the world, but the total invested in ETFs on the ASX has increased by around 30%-40% a year over the past six years from $25 billion to $125 billion.

BlackRock's research shows that during the Covid period in 2020, ETFs really took off, with 40 million new self-directed ETF accounts opened. Of those, there has been a surge of interest by millennials or people in their early to mid-30s.

"The main reason for that is diversification, the low cost and the ease of actually buying an ETF versus other structures," says Collins.

The diversity of ETFs listed on the ASX continues to expand, with many types of specialist funds. For example, in 2022 BlackRock launched the iShares Future Tech Innovators ETF (ASX: ITEK), a future technology fund that holds robotics, clean energy and electric vehicle companies. It also launched a global bond ETF, iShares Global Aggregate Bond ESG (AESG).

The three other iShares ETFs launched in 2022 included two multi-sector ETFs: iShares Balanced ESG (IBAL) and iShares High Growth ESG (IGRO).

Collins says BlackRock has an education focus.

"iShares are all about democratisation of investing and the Balanced ESG fund is focused on the next generation of investor as opposed to the next generation of trader. "It is pretty much proven now that asset allocation is the largest contributor to returns that an investor has."

Andrew Landman, BlackRock's managing director of Australasia, says the convenience of ETFs is enabling a new generation to invest.

"ETFs have helped more Australian investors access diversified exposures and portfolio outcomes, and ultimately pursue their long-term wealth-creation and investment goals."

At a moment in time marked by global COVID outbreaks, war and climate change fuelling a struggling sharemarket, falling house prices and rising energy bills, we don't blame you.

Thankfully, though, there are sage and steady voices amid the noise, eight of which have lent their wisdom to this series: Where to invest $10k. 

Where should a beginner investor put their money?

The most important aspect for beginners to consider in investing is a process and a journey.

Experience and achieving a greater appreciation of one's risk tolerance, patience and emotional traits will assist you over the longer term in making more informed decisions.

No matter what stage of investing you are at, the first thing to assess is how much time and effort you want to commit, bearing in mind that markets are ever changing and evolving.

For a beginner, I always suggest a good starting point is investing indirectly through a one-size-fits-all financial product, such as an exchange traded fund (ETF).

An ETF offers exposure to a basket or group of companies (shares) that reflect an index, such as the S&P/ASX 200 (the top 200 shares listed in Australia) or a theme such as quality shares, decarbonisation or cybersecurity.

An ETF is one listed share (entity) that you can buy and sell on the sharemarket that represents an underlying group of shares. The product removes the need for beginners to make the more challenging decisions of direct stock picking and different price levels.

But a new investor does not have to rely solely on ETF products; they can evolve as their experience grows with their savings and over time develop the confidence to select and invest directly in individual shares.

The key difference between an ETF and buying a share directly is you are concentrating your investment risk into one company when you invest directly in individual shares.

Where are we now in the cycle?

In the later part of 2022, selling across global equity markets, including Australia and the US, means investors are being offered much more attractive price entry levels.

The first lesson for beginners is that timing the markets is, for most people, very challenging.

Therefore, investors should look two to three years out with the risks of earnings recessions continuing to potentially weigh on share prices over the short term and bear market volatility (falling and rising share prices like a roller-coaster) causing a lot of fear.

Beginners should not try to focus on trading the markets - as many newcomers have discovered, it is not as easy as it may seem in bull markets, such as 2020-21.

Investing one's savings for the medium to longer term will allow the companies to grow earnings and dividends, which - all things being equal - will generate not only capital appreciation in the share price, but also growth in dividend income.

My preferred stocks to buy are normally in the quality category, with a proven track record, strong cashflows, dividend growth and a robust balance sheet as well as a solid competitive advantage.

Quality companies exist across all sectors, from consumer discretionary (consumer products) to cyclicals (banks, resources, housing) and defensives (healthcare).

Where I would invest $10k

I would focus on quality companies with resilient cashflows, strong balance sheets and the capacity to generate dividend income growth or share buybacks, such as large-cap stocks like CSL, Telstra, BHP, Woolworths and Commonwealth Bank.

In the technology sector, WiseTech Global and TechnologyOne are favourites, and data centre developer and operator NextDC.

Other favourites to buy on weakness are ProMedicus, REA, Carsales and Seek.

However, when central banks pivot - move from a tightening bias (raising interest rates) to a loosening bias (cutting interest rates) - the stocks that will rally the most will be cyclical companies, such as James Hardie (housing), Temple and Webster and Wesfarmers (consumer discretionary) and Goodman Group and Charter Hall (property).

In the US, I continue to like the secular growth themes in decarbonisation, the cloud migration and cybersecurity, with names such as Google, Amazon, Apple, Tesla, Enphase Energy, Palo Alto and CrowdStrike. Quality technology stocks I like are healthcare and pharmaceutical stocks such as Eli Lilly and UnitedHealthcare.

Consumer stocks and retailers like Nike, Costco, Home Depot are also on my list. Asset managers including BlackRock and Blackstone, as well as Morgan Stanley, and software companies, such as Intuit and Salesforce.

Australians made nearly $10 billion profit in ETFs over the past year

The Australian market for exchange traded funds (ETFs) grew 32% over the last 12 months - and has quintupled in size over the past five years, growing at a rate of 38% annually.

That's according to the 2022 Stockspot ETF report, which claims Australians made nearly $10 billion profit in ETFs over the past year.

With results like that it's no surprise that ETFs are not just being used by grown-ups.

The report shows Stockspot Kids' accounts have grown by 45% as parents and grandparents are increasingly looking for ways to invest for their children and grandchildren rather than keeping money in a low interest savings account.

The cost of kindness: Bank of Mum and Dad may cause mortgage heartache

First home buyers in five local government areas (LGAs) of NSW are at higher risk of losing the roofs over their heads following recent interest rate rises, according to property data provider, National Property Group.

The probable culprit? Well-meaning parents.

Fuelled by a mortgage lending spree, 2021 was a record year for Australia's ninth biggest lender, the Bank of Mum and Dad.

A whopping 60% of first home buyers turned to their parents for financial assistance to make their property dreams a reality, with Bank of Mum and Dad loans totalling a staggering $34 billion.

But experts warn that those who borrow money from their parents to fund a property are twice as likely to default on their mortgage within five years.

"Our data identifies key markets across metro and regional NSW where home values are starting to fall, which increases the risk of negative equity for some previous purchasers," says Don Harb, chief operating officer of National Property Group.

He cautions, "The local government area of Ryde has seen a 16.8% fall in property values. We're also seeing slight dips in home prices in regional LGAs such as Queanbeyan. For Bank of Mum and Dad buyers and lenders, these trends could signal that it's time to assess their financial future."

Property market tops $10 trillion mark

The total value of Australia's residential property market rose by $221.2 billion in the March quarter 2022, according to the Australian Bureau of Statistics (ABS).

It brings the total value of Australia's 10.8 million dwellings to $10.2 trillion for the first time.

Michelle Marquardt, head of Prices Statistics at the ABS, says, "The total value of residential dwellings rose $1.8 trillion in the 12 months to the March quarter 2022 from $8.4 trillion in the March quarter 2021."

The market trend shown in the ABS graph below highlights that while residential property may have its share of ups and downs, the long term trajectory is upwards. Good news for those concerned about the current cooling of the market.

New agribusiness index launched

The combination of supply chain issues, conflict in Ukraine and flooding on Australia's east coast has seen rising food costs make headlines. But as food shortages become a global concern, investors are turning their attention to the agribusiness sector.

This has driven the launch of a new Aussie sharemarket index - the S&P/ASX Agribusiness Index.

The new broad-based index includes companies that produce agricultural products as well as those that make inputs used in agricultural products.

Ken Chapman, Head of Strategic Delivery, Capital Markets at ASX, says, "By raising the profile of the sector, the AgBiz Index will increase investor understanding and interest, and be a critical ingredient in priming the market for the next phase of agricultural innovation."

Despite its infancy, the new AgBiz Index fell 8% in June.

Younger generation leading SMSF spike

The Vanguard/Investment Trends 2022 SMSF Report says Self-Managed Super Funds (SMSF) are enjoying a resurgence, driven by a new breed of younger trustees who are more confident and more engaged with their super.

According to the report, the desire for more control over investments remains a key driver for using a SMSF. However, younger SMSF trustees are also aiming to achieve better returns than APRA regulated funds.

Balaji Gopal, Head of Personal Investor, Vanguard Australia, says, "Research tells us that a record number of new investors made their first trade during the pandemic and a large proportion of these new investors were Millennial and Gen Zs.

"Unsurprisingly, many of them want full control of their retirement, and superannuation is a vital component of that journey."

Consistent with previous years, the report shows SMSFs continue to allocate more than half their portfolio to direct shares and cash.

The 13% drop in Aussie shares over the last quarter could mean recently established SMSFs are facing a bumpy ride.

However, Gopal advises, "History has shown that disciplined investors who stay the course and ignore the short-term noise from financial markets are rewarded when indices eventually rise."

Indeed, it's hard to believe after years of worrying about deflation, but headline consumer price inflation in the United States is over 8% - the highest in 40 years.

Even in Australia, headline inflation is just over 5%, the highest since the early 1990s.

What's to account for the rise in inflation?

For starters, global demand has recovered strongly over the past year, as consumers emerge from COVID lockdowns cashed up and ready to spend. In turn, strong demand has aggravated lingering supply-chain disruptions, creating product shortages and higher prices. Add to the mix Russia's invasion of Ukraine - which has disrupted the global supply of food and energy and contributed to the upward pressure on prices.

To contain the upsurge in inflation- and prevent the development of a potential wage-price spiral due to tight labour markets - central banks are starting to hike interest rates. Rising interest rates in turn have placed downward pressure on equity valuations and given rise to concerns of a global growth slowdown.

All this begs the question: how can investors protect themselves if the lift in inflation proves to be persistent?

One area of potential interest in this heightened inflationary period is commodities.

The chart, for example, below depicts the relative performance of various commodity-related ETF exposures:

1. Global energy producers (ASX: FUEL)
2. Australian resource companies (ASX: QRE)
3. Global gold producers (ASX: MNRS)
4. Global food producers (ASX: FOOD)

Source: Bloomberg, BetaShares. Relative performance to MSCI ACWI for global exposures, S&P/ASX 200 for QRE. Past performance is not indicative of future performance.

As evident, all have enjoyed solid performance versus global equities over recent months, in line with the strength in oil, gold, food and iron ore prices. As is also apparent, commodity exposures, in general, have been outperforming since late last year - before Russia's assault on Ukraine - in line with the solid post-COVID recovery in global economic growth.

The fifth exposure which has tended to do relatively well in an environment of rising interest rates is global banks (ASX: BNKS). This is because rising rates tend to be associated with stronger profits margins as medium-term bank lending rates tend to widen by more than the cost of short-term funding costs. Rising credit demand due to strong economic growth also tends to be supportive of global banks.

As seen in the chart below, global banks have tended to outperform since late 2020 - in line with the trend higher in bond yields. They suffered a modest relative performance setback more recently despite the further surge higher in bond yields.

This appears to reflect concerns over the possible financial market impact of global sanctions on Russia, such as the write-down of certain Russian financial assets and even a potential sovereign debt default.

That said, given the substantial lift in global interest rates - and the likelihood they may well rise higher or at least hold around current levels - there appears to be scope for further potential "catch-up" relative performance by global banks in the coming months.

Last but not least, it's also worth noting that energy, materials and financial stocks are still trading at reasonable price-to-earnings discounts from their long-run averages.

The global MSCI materials sector is trading at a price-to-forward earnings ratio of 10.8 compared with an average since 2013 of 15.2*. The same attractive valuation argument also broadly holds true for the energy and financial sectors.

By contrast, even with the sharp decline in the global technology sector in recent months, current PE valuations are now only back in line with their long-run average.

*Averages since 2013 are used as a reasonable valuation metric as global bond yields broadly began to flatten out from this period after having trended downward for several decades previously.

Far from weakening the resolve, the experience of living through a global pandemic has reinforced the value of being able to ditch the 9-5.

Over the next few weeks, we're sharing the stories of half a dozen Aussies who are determined to break free.

Michelle
AIM: Retire in a few years by having saved 80% of earnings for the past seven years.
INCOME NEEDED: $80,000-$100,000 a year in passive income.
INVESTMENT STRATEGY: An investment property and super plus a share portfolio of ETFs and LICs that holds 40% in global (ex-Australia), 20% ethical, 20% US, 10% Australian and 10% emerging markets. 

What prompted Michelle Ives to take the journey to financial independence is clear to her: "It was the notion of sitting at a desk five days a week, being barked at by a boss until I am in my 70s.

"I saw an opportunity to buy back my life, and I'm taking it," says Michelle, who started the That Girl on Fire blog three years ago. On it she writes about her family's journey of saving, minimalism, money management, investing in property and superannuation.

Michelle, with her husband, whom she affectionately calls Captain Babestick, have been on the FIRE journey for seven years.

They typically save and invest 80% of what they earn. A couple of years ago they had a son and Michelle is determined that financial independence can still happen with a child.

But their life changed when the pandemic began two years ago. Their small inner-city home didn't fit with working from home and a colicky baby. They bought a bigger house out of the city when the real estate market was weak and experts predicted home prices would fall. Since then, their bigger home has more than doubled in value.

Michelle runs her own business. But even loving her own business and the flexibility that gives her, she still wants to be financially independent. "I still feel this way, even as a fully self-employed person of five years who loves what they do and how they work," she says. "It's a very, very powerful feeling to have financial control over your life.

"Stress and anxiety around money affects self-worth and has a knock-on to almost every core relationship, so particularly as a woman, it's important for me to create and have financial independence."

Michelle loves the term "FU money".

She says: "Without sounding crass, it's a very important thing as a woman in this world to have the power to leave a job, a place or a bad situation without needing help or depending on someone.

"Money doesn't define me, but it certainly makes me feel more secure in the world and in myself."

It is worth all the scrimping and saving, she says. How did they do it?

"We're big proponents of printing out and analysing your spending with a fine-tooth comb," says Michelle.

"Take a bank statement from any given month and highlight every purchase that you either don't remember making, don't know what is, or can see did not bring you sustained happiness beyond the initial dopamine hit."

They pared back their spending and made a habit to spend mindfully. They found that they had larger amounts to work with.

"The next step was automating how we saved. So, as soon as a wage or invoice was paid, it was spit-balled into different accounts straightaway: 25% to mortgages, 10% to emergency fund, 30% to share trading account, 5% to pet fund, 5% to the bills account, where the debits were set up.

"As a self-employed person, I also keep some aside for tax and pay a lump sum into my superannuation fund. Any left over is for fun and frivolity." This takes away the mental load and gives them a clear amount to play with. Some people find it helpful to have this in a separate play account or withdraw it as cash. When the cash is gone, it's gone.

"This engagement with money has led to me learning about all sorts of different structures of wealth - like trusts and tax, for example," says Michelle. "I was able to jump headfirst into starting my own business because I wasn't afraid of any of the unknowns of setting it up and running it."

People have been changing jobs in droves in search for more meaningful endeavours or lifestyle shifts, with some ditching the daily grind altogether. 

We are shining the spotlight on six Aussies who are following the road to financial independence and early retirement.

Dave
RETIRED: At 28.
INCOME NEEDED: $45,000 a year for Dave and Alison.
INVESTMENT STRATEGY: Selling down investment properties and buying more index funds and REITs.

When you ask people about their saving and investing, often they will tell you that they don't earn enough to do either.

Dave Gow turns that excuse on its head. Dave and his partner Alison both earned around $75,000pa on average. Remarkably, Dave retired early at the age of only 28.

It took him 10 years to save enough and invest to generate an income to do the simple things in life that he loves. He never spends the capital, living on the income. "We just buy what we need and whatever we feel is worthwhile," he says.

How did Dave retire at 28?

After starting work at 18 and saving 20% of his salary, he quickly became disillusioned with his job and saw his fellow workers were unhappy and unsatisfied, living pay day to pay day. He realised he didn't want to be "a cog in the machine for the next 40 years".

At 19, Dave upped his saving rate to 35%. By 20, he raised it to 50% and started to learn about investing, particularly buying property. At 21, he met Alison, who loved the idea of financial independence too.

By 22, Dave, working as a forklift driver, bought an investment property and they lifted their savings rate to 60%. When Dave was 23 he bought another investment property and Alison bought one too. Dave worked overtime to rev up his savings rate to 65%.

At 24, Dave and Alison officially joined their finances and bought an investment property together. Their savings went up to 70%. At 25, they bought two more properties and rented out a room in their house. Their savings reached 75%.

When he was 26, after buying one more property, he started to learn about investing in shares and the stream of income that dividends generate. "Also we realised that we didn't need as much as we thought to retire," says Dave. They sold their first property to start investing in shares.

At 28, they reached financial independence, left their full-time jobs and, as Dave says, "got our lives back". They continued building their share portfolio, using dividends and cash from property sales to live on. They earn some income from part-time work they really enjoy.

Not surprisingly, people want to know how Dave managed to retire at 28, so he started a blog, Strong Money Australia, to explain his mindset and strategies that helped him reach financial independence. He found he really enjoys writing and answering readers' questions.

Two years ago, Dave teamed with Pat Seyrak, known in the FIRE community for his lifelong shuffle.com blog. Pat is 60% on the way to reaching his goal of $1.2 million. Their FIRE and Chill fortnightly podcasts about money and investing topics range from "Is insurance worth it?" and "Are young people screwed?" to "Buying property" and "50 low-cost enjoyable things to do".

Dave's experience with investment properties compared with index funds is illuminating. He reviewed a recent management statement for one of his investment properties and the $5000 he earned, after costs, resulted in $500 for him - not including the mortgage.

In comparison, a dividend payment of $4000 from his exchange traded funds and shares carried no bills and even some tax credits. All of it was income.

Both Dave and Pat have surprised the FIRE movement by buying a house to live in. They were renters for years. After living in a small apartment, Pat says he is looking forward to having extra space and a garden and being able to make adjustments to the house.

The property is outside the city, close to bike tracks and the beach. He has gone with Tic:Toc, an online bank with low rates, for his mortgage.

Dave has bought in the same street, on the same side, where he has rented for four and a half years. Long-necked turtles lay their eggs near his property. Every year he helps the baby turtles into the nearby lake.

Dave and Alison moved to the area, with a regional park and lake on their doorstep, when they no longer had to be close to work when they retired. They love the area, riding their bikes and walking Boss, their dog, and had always said they would buy a house if one ever came on the market.

They are selling an investment property to help fund the house, which is rundown. Dave says they will stretch out their home-works budget and aren't in a hurry to fix it up all at once. "People get so fascinated and obsessed with how they want their home. It never ends."

Dave's next book comes out later this year. It aims to teach people to think about financial independence so that they can adapt his philosophies and do it themselves.

Dave's top investment tip

I use Pearler, a low-cost brokerage platform for long term investors. People like us in the FIRE community weren't being served well before, since brokers just want people to trade, trade, trade.

Dave says the features of traditional online brokers are typically a distraction and a hindrance to long-term investors.

Pearler's "auto invest" feature allows investors to set up a direct debit each week, month or whenever it suits to automatically buy shares, such as exchange traded funds and listed investment companies. Over time, the compounding effect builds a portfolio that can lead to financial independence, a home deposit or other financial goal.

The three most popular investments made by Pearler's 29,000 investors are three Vanguard ETFs: Vanguard Australian Shares Index (ASX: VAS), Vanguard Diversified High Growth Index (VDHG) and Vanguard MSCI Index International Shares (VGS).

Pearler charges $9.50 for a trade on the ASX. It has done a deal with some ETFs so that they are brokerage free if you hold them for a year.

Pearler has impressed Dave so much he has invested in the group.

Update: Dave Gow has since shut down the Fire and Chill podcast.

Thematic ETFs have grown by 400% over the past year. They cover various investment niches and include some that have performed well recently.

Some have done well in the pandemic, delivering eye-watering results such as the ETFs Battery Tech and Lithium ETF, which returned 20.6% for the year to December 20, 2021, and 31.9%pa over the past three years; the ETFS FANG, which returned 20.7% over one year; and BetaShares S&P/ASX Australian Technology ETF, which delivered 16.5% over the year to November 30.

There are 20 thematic funds out of the 277 ETFs in Australia.

Thematic ETFs have attracted $4.33 billion out of the total $132 billion. They are from ETF providers such as BetaShares, ETFS and VanEck Global. Globally, there are 475 thematic ETFs holding $US252 billion ($348 billion), according to Bloomberg, up from 330 thematic ETFs worth $US119 billion a year ago.

These ETFs can give investors an easy way to invest in areas that are on trend.

For example, HACK invests in global cybersecurity companies, ROBO in global robotics and artificial intelligence, ACDC in battery technology and lithium, ERTH in innovative climate change companies, CRYO in companies that are involved in cryptocurrency, FANG in new technology companies, DRUG in healthcare and SEMI in semi-conductor companies.

Catch the big trends

Not surprisingly, thematic ETFs have captured the imagination of investors, particularly younger, tech-savvy millennials. Tim Murphy, head of fund manager research at Morningstar, says they are typically self-directed investors.

"Overall, investors are increasingly turning to ETFs to add exposure to high-conviction megatrends in their portfolios," says Alex Vynokur, CEO of BetaShares, which has nine thematic ETFs and eight ethical ETFs listed on the ASX. "For example, many investors can see efforts to address climate change is a long-term megatrend that has decades of growth ahead."

Around 1.73 million Australians hold ETFs in their portfolios. Stockspot's ETF report estimates ETFs have saved Australian investors $500 million a year in fees compared with more expensive actively managed funds.

Murphy says the widely diversified, broad-based, low-cost index investing space is already taken up by managers such as Vanguard, State Street Global Advisors and BlackRock.

"There are only so many ways to track an index," says Murphy, who believes there are many ways to actively manage investments.

Some investors chasing past performance believe thematic ETFs can be a short cut to wealth, says Chris Brycki, CEO of leading robo adviser Stockspot.

But the problem with chasing past performance is that often much of the return is already built into the share price of the companies within the ETF by the time it launches. "Thematic ETFs usually launch when retail interest is already near its peak," he says.

Brycki tells his dad that if it's in the newspaper, it's already priced in the market.

"It's not useful information once it is in the market; it's only useful when people don't have the information."

Some thematic ETFs have performed poorly. For example, the BetaShares Asia Technology Tigers ETF has lost 6.95% over the year to November 30, 2021. Or the ETFS Biotech ETF has lost 9.3% over a year.

Place your bets, please

Then there is the dilemma about which theme to choose. With 20 thematic ETFs, how do you predict the next big thing?

The decision can be like a trifecta bet, says Ben Johnson, Morningstar analyst.

The three variables are: 
1. Picking a winning theme. 
2. Selecting a fund that is well placed to harness that theme. 
3. Making your wager when valuations show that the market hasn't already priced in the theme's potential.

The chances of getting all three right so the fund will outperform over the long term are slim, says Johnson.

In contrast to the thematic funds, there are ETFs that incorporate a range of themes and sectors, so if one theme or sector underperforms, it is cushioned by its diversification.

Johnson says the index methodologies are the ETFs' DNA. They dictate and weight the investments. For example, the biggest ETF listed on the ASX is Vanguard's Australian Shares Index with $9.7 billion. It invests in the top 300 Australian companies as set down in the S&P/ASX 300 index.

These companies make up more than 97% of the ASX, with financial and resource companies making up almost 50% of the index, followed by healthcare, consumer, real estate, industrial, consumer staples, IT and communication services companies. The fee is only 0.1%. The ETF has had a strong year, returning 16.1% to the end of November

Broad-based ETFs have lower fees than thematic ETFs. Stockspot estimates the average fee of thematic ETFs launched on the ASX in 2021 is 0.77%, which is seven times higher than typical broad-market ETFs.

Most hot sectors of the market eventually lose their shine, which is why investors in thematic ETFs need to be cautious, says Brycki.

Data shows that new ETFs typically underperform after they list, according to Marc Jocum, investment manager at Stockspot.

"Investment sentiment is sometimes a powerful contrarian predictor of returns," he says.

Research shows that thematic ETFs launched in the US between 1993 and 2019 underperformed the broad market index by 4%pa for at least five years after they launched.

"Historically you would have lost around 20% over five years relative to the broad market if you have invested into all thematic ETFs when they launched," says Jocum.

Another study found that the maximum point of outperformance of a theme is usually when the product issuer lodges the application for an ETF, which is around three to six months before listing.
While it is tempting to place a large proportion of your investment capital into a high-performing product, investors need to be measured.

"Investors should use thematic ETFs as portfolio satellites to enhance returns," says Vynokur.

Take an ethical tilt

Vynokur recommends investors hold the core of the portfolio in low-cost ETFs that have broad exposure to large-cap Australian and international equities. But among the other assets there could be some thematic ETFs. He recommends BetaShares FAIR or ETHI, which invest in a portfolio of large Australian or international companies that meet strict sustainability and ethical standards.

"Thematic funds, like ERTH, could then be used to tilt the portfolio towards genuine investment megatrends and long-term growth sectors," he says.

He says investors recognise that investing in new industries, developing alternative energy sources or addressing climate change is not only the right thing to do, but also a business opportunity.

"On the back of this trend, ethical ETFs continue to grow in popularity as investors seek to align their portfolios with their values while at the same time meeting their investment goals."

Thematic ETFs often shut down because they don't attract enough funds to cover the operational costs. In the US, of the 277 ETFs that shut down in 2020, one quarter didn't make it to their third birthday. Jocum says that they shut down because of limited take-up and underperformance. "As time goes on, there is increasing riskiness that these funds may lag the broader market or subsequently shut down."

Once an ETF closes, investors are forced to sell, triggering capital gains tax, and they have to decide where else to invest. Ironically, one of the best times of performance can be after it shuts down, says Jocum.

He has three examples. The BetaShares Commodities Basket ETF shut in December 2020 right before the underlying commodity basket rose 35%.

The Russell Investments Australian Value ETF shut in May 2018 after the value factor endured a decade of underperformance, but value investing has bounced back. VanEck closed its Australian Emerging Resources ETF in July 2016, just before mid-cap miners rallied by more than 50% over the next two years.

Know when to get out

Rather than buying because of recent performance, Johnson recommends investors analyse the theme. He says the theme should be robust and logical as well as having data to back up the growth story.

Understand how the theme will age and over what timeframe it is expected to play out, because you want to know when to exit.

"Having pre-set exit criteria based on robust metrics such as valuation ratios will help protect against poor investment decisions. These should be monitored regularly," recommends Johnson.

There can be several approaches to harnessing a theme. Funds tracking a similar theme can end up being significantly different from one another. This creates an additional burden of due diligence and monitoring for investors.

Gold can be held directly or more conveniently through shares in mining companies, managed funds or themed ETFs. But why does gold remain useful in a diversified portfolio?

And is cryptocurrency used as a defensive asset taking some of the shine off gold's reputation?

In this episode of the Friends With Money podcast, senior journalist David Thornton is joined by well-known businessman and successful investor Mark Bouris, who shares his thoughts on gold as an investment, addresses the volatility in markets today, and also provides some valuable insights into portfolio diversification.

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I was in the second camp at one point.

Then I discovered the joys of ETFs and why they are favoured by the early retirement crowd.

What is an ETF?

Exchange traded funds (aka ETFs) are, in broad terms, a diversified investment vehicle. They are the brainchild of Jack Bogle, who first created Vanguard index funds in 1976.

The premise of index funds is that rather trying to beat the market, it's easier to go along with it by creating a basket of shares that mirror an index.

Danielle Ecuyer, author of Shareplicity, likens buying ETFs to buying a bag of lollies.

"It's a wrapper that reflects an underlying basket of shares that is normally an index - but it can also be thematic, for example, clean energy, cyber security, or financial services," she says.

An ETF is basically the same index fund but traded on the share market.

According to Kurt Walkom, co-founder of share trading platform Pearler, an index fund and an ETF are the same.

But with an ETF, the fund manager decides to list on the share market so that the fund can scale better. People in the FIRE movement typically prefer ETFs over index funds as the fees are slightly lower even though it's essentially the same product.

My ETF journey

I opened my first index fund in 2010. A few years earlier I had participated in a local share trading course. One week, the instructor mentioned something called an index fund that had low fees and a diversified portfolio. I was sceptical: it sounded too good to be true. But intrigued, I began to investigate before starting a Vanguard product with an initial investment of $5000.

When my marriage ended in 2014, I sold the joint index funds to ensure cash during a difficult time. I later started a solo index fund to store savings until the property consent orders were implemented.

Once I got ownership of my own home, I sold the index fund to help pay down the mortgage aiming to create sufficient equity to give myself an emergency fund. More recently, I started reinvesting in ETFs during the depths of the market slump last year.

As my new hubby approaches retirement, we are gradually selling down investment properties and investing into ETFs. We love the ease of ETF investment and I've become a bit addicted to checking our growing ETF portfolio balance online.

ETFs and FIRE

The financial independence retire early (FIRE) movement loves a good ETF.

The FIRE movement, made popular by financial influencers such as Mr Money Moustache aka Peter Adeney is about living frugally and investing prolifically to reach financial independence early, relying on the power of compound interest.

Not all FIRE devotees use ETFs as their investment vehicle of choice, but they are easily the most fashionable.

Walkom says ETFs are popular with those on a FIRE journey because it is easy to track financial independence goals.

"You want to get a passive income that covers your expenses - then you are FIRED," he says.

Ecuyer believes younger people in particular are looking for investment options outside of a low-interest bank account - especially to turbo-charge saving for a home deposit. And younger investors haven't been scarred by the global financial crisis.

"They are saying hey, we can't really afford to invest in property in property at the moment, but we want to do something with our savings so that maybe we can afford to buy a property," she says

Technology has also made ETFs more accessible - and fun.

No longer do you need a stockbroker and a significant lump sum to trade; online share trading platforms that use gamification have made it easy - and cheap - to invest in ETFs. Micro-investing sites such as RAIZ, Spaceship and CommSec Pocketbook also make it easy for young people to invest small amounts in index funds.

Advantages and disadvantages of ETF investing

A key advantage of ETFs is that they offer diversification, which helps reduce risk.

If you only invest in one company, it's a bit like placing all your money on a horse in the Melbourne Cup: if it wins, you will get a big payout but there is a high chance you might not back the winner. In contrast, index funds and ETFs allow investors to back all the horses in the race.

The diversified nature of ETFs also means that you don't need to spend hours and hours researching stocks before deciding what to invest in.

Walkom says that instead of spending time on research, people can channel that time into working extra hours to earn more money to invest into more ETFs.

But buying the basket also means accepting the bad eggs as well as the good; sometimes that can mean an average result despite individual standouts.

According to Scott Phillips, chief investment officer at the Motley Fool, an ETF investment means you get a market return minus some fees.

"For most people, that's enough," he says. "But if you have an appetite for a bit more risk, and you want to beat the market, individual shares are the way to go." He also cautions that in the Australian market, it is difficult to get a truly diversified ETF as the top companies on the ASX are heavily weighted with financial services and mining.

Another key advantage of ETFs is their low fees. But Phillips warns that not all ETFs are the same.

"These days there are more ETFs in the US than stocks," he says. "Nearly every fund manager creates ETFs - and then wants you to buy theirs. Why would someone invent an ETF? They want you to buy it, and if you buy it, you're paying fees." He advises people to understand what they are investing in to minimise this risk.

ETFs have been in Australia for 20 years, and in that time, they have witnessed rapid growth. They are here to stay. With rapid advances in technology, I can only imagine what they will be like when they hit 40.

These underlying assets are then held by a trustee on behalf of unit holders.

Investors get a distribution every financial year of dividends (less expenses) and capital gains from the underlying investments.

Passive vs active

There are two main types of ETFs: passive and active.

Passive ETFs typically track an index, by buying all or a representative sample of the securities in it. This can be a broad market index, such as the S&P ASX200, a sector index, or a custom-built index.

When people mention ETFs, it's likely they're talking about passive ETFs. But there are also active ETFs.

Active ETFs represent a far smaller segment of the ETF market, and are much like traditional managed funds.

Fund managers will do research to then buy the selection of stocks that they think will best achieve the fund's mandate.

"Although there are more active ETFs to choose from than ever before, ETFs that track an index still dominate, with 82% of investors using this style," says the head of SPDR ETF Asia Pacific Distribution, Meaghan Victor.

Premiums and discounts

While ETFs are generally priced based on the value of their underlying assets - the net asset value (NAV) - they can also trade at a premium or discount to this.

If investors quickly bid up the price they're willing to pay for an ETF, this will result in a premium on the NAV. Inversely, if they quickly sell off ETF units, then the ETF may trade at a discount.

However, premiums and discounts are usually fleeting, as broker-dealers typically take advantage of this by arbitraging the price difference back to fair value.

You can calculate the NAV, to compare to the listing price, by taking the assets of the fund, subtracting the liabilities and dividing this by the number of units in the fund.

Trading

ETFs can be bought or sold through a stockbroker or an automated trading platform such as CommSec.

Remember that settlement can occur up to two days after the buy or sell order is placed.

In order to avoid paying a premium to the NAV, its best to buy ETFs when the market is open. Equally, if you want to buy an ETF full of international equities, try buy when the main market it's exposed to is open.

History

The first ETFs - the SPDR S&P/ASX 50 Fund and the SPDR S&P/ASX 200 Fund - launched in Australia 20 years ago.

As of July 30, 2021, there were 223 ETFs representing a market capitalisation of $116.5 billion.

Their rising popularity has dovetailed crises, first the global financial crisis and then the COVID-19 pandemic.

"What we have seen during market crises is that ETF trading volumes have surged, highlighting that ETFs continue to function as originally intended - as buffers and sources of liquidity in stressed markets," says Victor.

"The COVID-19 pandemic has brought extreme challenges to markets across the globe, impacting liquidity across nearly all investment vehicles and asset classes," says Victor.

"Yet despite these challenges, ETFs have performed well, providing market participants with liquidity and price discovery when they need it most. Investors are particularly drawn to ETFs as a way to take advantage market downturns.

Advantages

Low cost

Passive ETFs generally have low ongoing fees since they don't demand the same amount management resources as do actively managed funds.

Up-front brokerage fees are comparable to any other stockmarket transaction. In this way, buying and selling an ETF is not dissimilar to buying and selling a single equity.

Diversification

ETFs provide extremely high levels of diversification. Indeed it's one of the free lunches in investment finance.

One ETF can provide instant exposure to an entire market or sector, for instance,

Transparency

Unlike managed funds, which typically disclose their holdings and results monthly, investors of an ETF can easily see current performance and what assets contribute to it.

Disadvantages

Won't beat the market

By definition, passive ETFs won't beat the index that they're designed to track. So while it's a safe bet that you'll capture most of the performance in the index as a whole, you won't enjoy the kind of outperformance possible with actively managed funds.

Liquidity

While the most popular ETFs are frequently traded, and thus have high liquidity, more obscure ETFs might not enjoy the same sort of turnover. If you hold an ETF with low turnover, then it may be hard to exit the position.

Currency risk

ETFs that invest in international securities may be adversely affected by currency changes. A rising Australian dollar will decrease the value of these investments. Some ETFs mitigate this risk by entering into forward foreign exchange contracts through a third party.

All you have to do is follow four easy steps.

Let's get started.

1. Choose your broker

As the name suggests, exchange traded funds (ETFs) are listed on the Australian Stock Exchange (ASX), and the only way to buy listed investments is through a registered stock broker.

The good news is that there are plenty of low-cost online brokers to choose from. Just Google online brokers.

Don't just focus on brokerage. Take a tour of the platform to make sure you're comfortable with the layout, and check features like the availability of quality research.

2. Open a broking account

Once you've selected an online broker, you'll need to set up a cash account linked to your broker's online trading account. This account holds money to buy ETFs and collects the proceeds if you sell any ETFs.

Some brokers specify which bank your linked account needs to be held with. Others are more flexible. Either way, setting up a cash account is pretty straightforward though it's quicker and easier if you're already a customer of the bank specified by your broker.

If that's not the case, you'll need to open a new account by providing 100 points of ID such as your driver's licence and passport plus your tax file number. It helps to have all these details on hand when you're ready to get started.

Once your application is submitted you can usually begin trading in as little as 24 hours.

3. Decide how much to invest

The minimum marketable parcel on the ASX is $500, so you'll need at least this amount plus brokerage for your first trade.

While it can be tempting to start small, trading with small sums will increase the cost of brokerage as a percentage of your trade. As a guide, brokerage of $15 works out to 3% off a $500 trade, but falls to 1.5% on a $1,000 trade.

If you're strapped for cash, it's possible to invest with just $50 and pay brokerage of only $2 by signing up to the CommSec Pocket app. It can be a money saver but you'll only get a choice of seven ETFs - and they may not be the ones you're interested in.

4. Buy your first ETF

Placing a buy order is where things start to get real. Log in to your online trading account, select the 'trading' option, and fill in the details of the ETF you want to buy. Each ETF has its own three- or four-digit ASX code - you can use this to identify your preferred ETF, but be sure to get it right.  The codes can be similar for entirely different ETFs.

Your first trade will be a 'buy', so select this option from the online menu. Enter the quantity of fund units you'd like to purchase, or set a dollar limit for your trade.

You'll likely be asked to choose between a 'market' order, which means you're happy to pay the current market value that the ETF units are trading for. Or, you can select a 'limit' order, which lets you nominate the maximum price you're willing to pay per unit.

Next, you'll be asked to review your order. Check that everything is correct, and click the button to complete your trade. In the blink of an eye your order is sent through to the ASX though it can take two days for the transaction to formally settle - you'll receive notification from your broker. That's all there is to it. You've just become an investor in exchange traded funds!

Close to one million Australians already own ETFs according to the 2020 ASX Investor Survey, and Minh Tieu, Vanguard's Head of ETF Capital Markets for Asia-Pacific, doesn't see investors losing their appetite for ETFs any time soon.

"The Australian ETF market has experienced remarkable growth in the last few years," he says." And we expect this to continue as more investors recognise the benefits of ETFs."

Rising demand will inevitably attract more ETF issuers to the market.

Tieu notes, "As ETF uptake increases, the variety of ETFs on offer will also expand to satisfy investor preferences, allowing more investors the opportunity to invest in an ETF that suits their goals and priorities.

Alongside this, Tieu says the growing number of online brokering platforms is making it easier for investors to access ETFs at lower fees than ever before.

Younger investors, SMSFs and advisers to drive the market

ETFs have especially resonated with younger investors. Research by BetaShares and Investment Trends shows Millennials make up 43% of new ETF investors, up from 12% more than five years ago. The ASX survey found 45% of next generation investors aged 18-24 plan to get into ETFs.

Financial adviser Helen Baker, says, "Many people who want to invest may only start with a small amount. ETFs allow them to diversify away from an individual share, and into a range of companies with what seems to be low cost."

Tieu agrees that ETFs can be "an excellent entry point for those just starting their investment journey." But it's not just millennials who will underpin demand for ETFs.

"We also expect financial advisers and self-managed super funds (SMSFs) to drive future growth," says Tieu. "ETFs have always been popular with advisers, and there's an increasing number who are choosing ETFs for their client portfolios because of their low fees and exposure to different asset classes and markets."

As evidence of this trend, BetaShares found 58% of advisers surveyed advised on ETFs in 2019, double the figure of a decade ago.

International ETFs gather interest

As vaccination rates rise across the globe and economies reopen, Australians are looking for ways to capitalise on international growth opportunities. ETFs can offer an affordable and hassle-free pathway.

According to Vanguard, global equity ETFs were the asset class of choice for Australian investors in the first half of 2021, attracting inflows worth $4.9 billion in the first six months of the year. By comparison, domestic share-based ETFs drew a total of A$1.5 billion over the same period - 69% less than global equities.

As confirmation of investor interest in overseas markets, of the 21 new exchange traded products that came onto the ASX in the 2020/21 financial year, 17 involved global equities.

Will global equities be part of a longer term movement? Tieu explains, "We expect this trend to continue in the near future, particularly as global economic recovery continues."

The rise of themed ETFs

In the financial world there is no shortage of market indices, and this is supporting the rise of so-called 'themed' or specialised ETFs. These allow investors to invest in global mega trends, anything from sustainability to robotics.

As a guide, in 2020 Van Eck launched its Video Gaming and Esports ETF, which give investors exposure to some of the world's largest companies involved in video game development by tracking the MVIS Global Video Gaming and eSports Index.

ETF Securities has several themed funds including the Battery Tech and Lithium ETF, which tracks the energy storage and production mega trend, as well as the ROBO Global Robotics and Automation ETF, which lets investors tap into the robotics and artificial intelligence revolution.

What's interesting about these themed ETFs is that they track niche markets. That's quite a departure from the broad diversification on which ETFs have built their appeal.

Recent research from the Swiss Finance Institute found themed ETFs don't always create as much value for investors as broad-based ETFs.

That's because these specialised ETFs may be launched just after the peak of excitement around popular investment themes, by which time the underlying stocks may be overvalued. Time will tell if themed ETFs continue to be part of a longer term trend.

Active rather than managed ETFs

When ETFs first launched in Australia back in 2001, the market was dominated by passively managed index funds. Today, a growing number of ETFs are actively managed. In the first half of 2021 alone, seven of the 15 newly listed ETFs were actively managed.

Vanguard's Minh Tieu, explains this trend saying, "An increasing number of active managers have seen how popular ETFs have become, and are now embracing the structure as a way to provide their services more accessibly."

He adds, "Investors are also embracing the opportunity to access actively management funds without the high fees and investment minimums usually associated with active management."

Nonetheless, Tieu believes index ETFs will continue to be popular as "they will still likely be lower in cost than actively managed ETFs".

Importantly, he points out the choice between actively managed and index ETFs is not mutually exclusive, adding, "Vanguard has long recommended a core-satellite investment approach, whereby investors use index funds as the core of their portfolio, and actively managed funds to complement them."

Children have a long-term investment time frame and ETFs are ideal long-term investments, explains head of personal investor at Vanguard, Balaji Gopal. Many of Vanguard's ETFs track a broad-based index such as the ASX 300 or the MSCI World index.

Gopal says ETFs tracking an index are set and forget investments that you buy and leave to accumulate over the years, without having to touch.

"You are not really relying on one or two companies to give you a long-term gain," says Gopal.

Over the long-term markets tend to go upwards, even if there are falls along the way, says Gopal.

The Vanguard Index Chart shows that $10,000 invested in the Australian sharemarket in 1991 was worth $160,498 thirty years later in 2021. That same $10,000 in Australian listed property rose to $118,013 while in US shares it reached $217,6420 in 2021. In contrast, $10,000 put in cash accumulated to only $38,938 over 30 years.

One of the best sorts of ETFs for children is a multi-asset class ETF that invests in a range of investments such as Australian and international shares, bonds, property and cash.

A broad variety of assets in an investment portfolio helps smooth out performance fluctuations over time and is one of the best ways to reduce exposure to market risk.

There are different multi-sector funds to fit various risk appetites from conservative to balanced to growth and high growth. Multi-sector funds are often called an all-in-one investment solution because you don't have to buy separate asset classes and mix them together.

Gopal says ETFs are tax efficient because they typically have low turnover. This means more money stays in the fund, rather than being paid out in tax. Gopal says Vanguard diversified funds typically hold onto their shares, rather than buying and selling like active share managers and this helps minimise capital gains.

Capital gains is a tax incurred by the investor as a result of selling securities. If parents or grandparents have a higher than usual marginal tax rate, the more they stand to benefit from a fund's tax efficiency.

Before ETFs appeared on the ASX 20 years ago, grandparents and parents typically bought individual shares or opened a cash savings account for their kids and grandkids. But cash rates are rock bottom and individual company shares can be risky if the share price of the company dives.

ETFs were the biggest ever disruptor to the asset management industry when they were launched in Australia 20 years. They were typically much cheaper than managed funds and tracked a broad-based index.

Over time investors caught on to ETFs and they are now a mainstay investment and often form the backbone of an investor's portfolio. There are more than 220 different ETFs on the ASX with assets of over $110 billion.

For busy parents and grandparents, multi-asset ETFs offer automatic rebalancing.

When the share allocation in the ETF goes down in value, the ETF will be buying shares to maintain its asset allocation. When shares go up in value, the ETF will be selling. It happens automatically so you don't have to worry about buying in when prices are low.

Investors value the ETFs' transparency too. ETFs are much easier to research than managed funds and you can see exactly what you are investing in.  Also with a broad-based index ETF you don't have to worry about who is managing your ETF, and if they leave the company.

Parents and grandparents can buy and sell ETFs on the Australian sharemarket through a broker. A discount online broker is the cheapest way to buy and sell ETFs and charge around $9 per transaction.

ETFs do not have any sales commissions but an annual expense ratio that is much lower than those charged by managed funds. Investors are benefiting from intense competition between ETF providers that has seen Vanguard drop its annual fee 0.10% on its Australian Shares ETF known as the VAS.

Going back two decades, who would have thought that a tradable basket of securities would become one of the most innovative and sought-after products for Australian investors?

Many financial advisers now recommend ETFs to their clients as part of a balanced portfolio strategy, and individual investors can gain cost-effective exposure to a broad range of asset classes that include shares, fixed interest, property and global currencies, to name just a few.

Younger investors are also embracing thematic ETFs, from technology to ESG.

In this episode of the Friends With Money podcast, journalist David Thornton is joined by Meaghan Victor, the head of SPDR ETFs for Asia Pacific at State Street Global Advisors, to discuss the rising popularity of ETFs, their future in the Australian investment landscape, and what sets them apart.

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For Pat Seyrak, it isn't that he doesn't like his job. He does. But his job is all-consuming and it doesn't leave much time to enjoy life's good experiences.

He wants to buy back his life. Instead of staying in his job as an engineer until he is in his mid-60s, he plans to retire early. Really early - at 35.

Pat and his partner, Steph, both millennials, want to take control of their lives now while their health is great, to get out and enjoy the world. They want a more balanced lifestyle with more time for family and friends.

They are followers of the popular personal finance FIRE movement - it stands for financial independence, retire early - who rigorously save $1 million or more, invest sensibly, retire in their prime and enjoy a modest, agreeable life.

It is the opposite of working flat-out throughout your life, piling on debt, living beyond your means and consuming voraciously.

And, no, they haven't won the lottery or been handed an inheritance or sold their software business for a small fortune. In fact, their salaries are fairly average.

"Most of us in the FIRE community realise how precious each year in our lives really is," says Mrs Money Flamingo, who is in her 30s and one of the many enlightening bloggers who write about their path to financial independence (FI).

"We see this as a major motivation to pursue FI," says the Sydney mother of two who has just reached her savings target.

"FI  allows us to buy back years we may otherwise have spent in a cubicle."

While most Australians rely on drip-feeding their 9.5% compulsory superannuation - up to a maximum concessional contribution of $25,000 a year - into a retirement account, FIREs are aggressively saving much more outside super.

The movement is based on the philosophy of the Canadian-born blogger Peter Adeney, aka Mr Money Mustache, who believes insane levels of consumerism are ruining people's lives. People are working longer and longer because they are spending more money on expensive stuff.

"Everyone is very inefficiently going about their lives. It affects their health. They are not getting fun out of their lives," Adeney told Tim Ferriss, the self-improvement guru.

New life of leisure 

A former software engineer, Adeney started blogging about his early retirement at 30 and subsequent "badass" life of leisure in 2011 at mrmoneymustache.com. He writes about how you can save 50% of your take-home pay from the age of 20 and retire at 37. If you can save 75% you can retire in seven years.

His "Mustachionism" lifestyle is about 50% cheaper than that of most of his peers and the surplus is invested in simple exchange traded funds and a rental house or two. He has inspired not only our seven case studies but has resonated with thousands of followers - there are 2.4 million posts on his Mr Money Mustache forum.

Money magazine first covered the FIRE movement in 2018 and we have now returned to check on how the seven case studies who had taken up saving hard are progressing. We also wanted to see how their investments were impacted by COVID's shockwaves.

With the exception of Tom, who was studying and working part-time and finding it hard to reach his savings goal, six of the case studies are still on track to becoming financially independent or have retired. Dave, from strongmoneyaustralia.com, who left school in year 11 and retired at 28, has been added to the case studies.

This is how they are going:
- Kate Campbell, now 22, is meeting her financial goals every year. She wants to retire when she is 40 but expects her savings target to change as her life evolves.
- Pat Seyrak, 32, is on track to retire at 35 with an annual income of $40,000.
- Dave, 32, retired when he was 28 and lives, together with his partner Alison, on $40,000 a year.
- Leo, 34, and Alisha, 32, (who have two children) are on track to retire this year with savings of $2.8 million and an annual income of $90,000.
- Serina Bird, 48, retired two years ago and her family is living on $60,000 to $70,000 a year.
- Jason, 48, is about a year and a half from reaching his target of $2.58 million, which will give him a $90,500 annual income.
- Joanna Jones, 63, who retired at 51 with over $1 million in superannuation, lives on $18,000 a year.

Hanging on despite the fear 

Being on track to financial independence is having a profound psychological effect on our case studies.

"As the journey has progressed, I have noticed a slowly accumulating feeling of ease and power over my circumstances," says Jason, who saves around 60% of his salary and runs the popular FI Explorer blog. "Progress in the journey exerts a subtle force across daily life barely noticeable at first - but it gradually transforms your perspective."

Looking back on his years of spending before he started his FI journey, Jason says he thinks about the stress and inflexibility that are the invisible cords a high-consumption lifestyle represents. "[It's] tying people to stressful jobs they don't like, or to work longer than they prefer."

When sharemarkets dived 40% this time last year, the investments of the FIRE community - often in low-cost, well-diversified index and exchange traded funds (ETFs) - took a big hit, as did those of most other investors.

"There was quite a lot of fear around. A lot of people thought it [the FIRE philosophy of investing in share ETFs] was a bad idea," says Dave, from strongmoneyaustralia.com. Reddit's FIRE message board was full of desperate posts that the movement was over. But Dave and the others held onto their investments, staying the course.

At the height of the market's downturn, 32-year-old Pat, who is halfway to his retirement goal of $1.2 million, said: "I will be purchasing market-cap-weighted index funds and continue to do so whether the market continues to go down or up after my purchase."

He wrote on his website, lifelongshuffle.com: "There are too many forecasts. Too many armchair experts. Too much chatter and emotion-driven behaviour. And too many short-term speculators.

"Instead of freaking out, avoid them," he says. "Turn down the chatter and take a break.  Go for a walk. Play with your kids. Just do anything else for a while. And continue on with your plan."

As it turned out, the downturn was shortlived and markets staged a remarkable recovery. Most investments are back to where they once were.

The philosophy of FIREs isn't about getting rich quick, but taking a slow path. They understand that market timing - trying to find the best time to get in and out of the shares - generally sucks.

With cash rates low, some FIREs have increased their shareholdings. Jason has raised his allocation to equities from 55% to 75%, which has meant placing all new money into low-cost diversified share ETFs.

His goal is an equal split between Australian and international equities while taking advantage of the tax advantages of Australian franked dividends.

FIREs relying on short-term renting of their investment properties through Airbnb had to adapt to the lockdowns. Serina Bird, who had been renting out her apartments for short-term stays, switched to long-term renting, which doesn't deliver as lucrative a rate of return.

COVID shone a light on the need to have the security of savings, a healthy emergency fund and the folly of drowning in debt - three essential beliefs of FIRE. "Times like this really reinforce the need to have good control over your finances as you never know what is around the corner," says Dave.

Research shows savings levels reached record levels during the pandemic. Worried about job security and the health of their family, Australians cut spending.

Dave says if you cling to the status quo and rely on a high income for your lifestyle, you are in a precarious position when things go wrong.

Network gives support 

The FIRE movement became a source of inspiration to support people changing their consumption patterns.  "I do love seeing more people in the FIRE space because it will help more people," says Dave.

Saving for the long haul is easier with a network of other FIREs and technology - websites, blogs, podcasts and calculators - that help you work out how much you need in retirement. There are impressive websites with transparent accounts of financial aims, savings patterns and the portfolios to help you reach your goals.

Of the seven case studies, Kate, Pat, Dave, Serina and Jason run blogs about their FIRE journey.

Jason doesn't reveal his real name as he is apprehensive about talking to his work colleagues about his plans to retire early. (Other case studies also use pseudonyms for privacy reasons.)

"For a concept that can seem niche, it's obvious that tens of thousands of Australians across the country are thinking about their financial life and the possibility of different forms of financial independence every day," he says.

Work out how much you need            

Instead of paying a financial planner to help you work out how much you need in retirement, FIREs have what the blogger Peter Adeney calls a "shockingly simple" formula: take your annual expenditure and multiply it by 25. "This will keep you going for the rest of your life," he says.

This assumes a conservative return or income of 4% a year.

If you only save 10% of your income, you won't be retiring early. It will take you 51 years. Adeney says if you cut out some flat whites and takeaway food, and boost your savings to 15% a year, you could retire eight years earlier.

If you can live off a third of your income and devote the other two-thirds to saving, you would reach 25 times in 12 to 13 years. Then if you continued to live that way, 4%pa income on your nest egg would 
cover your living expenses.

For example, if a couple earns $121,700pa after tax and lives on $40,000, they can save $81,700 a year. If the savings earn a rate of return of 4% after inflation, in 10 years they will have $1 million in today's money. If that can continue to be invested at 4% after inflation, they can live on $40,000pa in today's money indefinitely because their capital is not diminishing.

Some FIREs have recalculated their return from investments after the shock of the pandemic-led sharemarket crash last year. They became more conservative and lowered the safe maximum drawdown rate from 4% to 3.5% a year. This means that for every $1 million invested, they will only draw down $35,000pa.

The key to the FIREs' retirement is that they aren't running down their capital. They have a cushion of emergency cash so that they don't realise losses. They're simply living off their investment income. Joanna Jones has seen her stash of retirement savings rise by 20% over the past decade as she lives on around $18,000, well under what her assets are earning.

There is a view that early retirement is a nutty thing to do and frugal living is joyless. But Pat says: "I think the FIRE community often gets labelled or wrongly characterised as an extreme fringe, but when you dive in it is hard to fault a lot of what the community stands for."

He says focusing your spending on those things that are important to you and bring you happiness, rather than on things that bring little or no value to your life, is a good thing. "It leads to building financial security and a healthier relationship with consumption, money and how it can have a profound impact on your life."

Contrary to popular belief, not all FIREs cut their spending to the bare bones.

"My journey hasn't had as strong a theme of cost-cutting as some other FI seekers," says Jason. "What I have learned, though, is the truth that there is something magical about even just monitoring costs. I used to be sceptical of this, but after tracking my total credit card purchases over the past several years, I have found that even as the cost of living has risen, the curve of spending has bent down slightly. This may not continue forever but it has been testament to the powerful impact of mindfulness and transparency about costs."

Many FIREs have a philosophy of enjoying their surroundings, such as the Australian bush.

"I get just as much, or more, joy sitting on my deck, looking out over my fantastic view as I would doing a lot of more expensive things, including eating out at a restaurant," says Joanna Jones.

"So why not do the less expensive thing and stay home to watch the view as the sun sets over the national park in the distance, and the valley light up as every street light turns on?"

But people find money very confronting, says Serina. FIRE bloggers, such as Serina, have come under, well, fire from social media trolls who like to hit back at certain posts.

Serina Bird posted about Fridge Fridays when her family would eat what was in the fridge rather than eating out or getting takeaway. She says she wasn't saying this is something people should do, but it worked for her family as a way to save money.

The abuse was huge.

"People feel very threatened by comments about money," she says.

Three years after we first profiled seven Aussies who are working towards early retirement, we caught up with them again to find out how their plans and investments have fared during COVID-19.