The best performing ETFs in Australia

There are few investment trends that have stood out more in recent years than the growth in popularity of exchange traded funds (ETFs) among investors.

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.

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