What is an ETF? A beginner's guide for Australian investors
Gen Z investors aren't trying to pick the next Nvidia. They're buying ETFs instead. But these low-cost funds aren't just for young investors. Here's why Aussies of all ages are taking notice.
Australians have more than $350 billion invested in more than 450 exchange traded funds (ETFs). New funds are being launched all the time and it's estimated that by 2027 Australian investors will be able to pick from more than 500 ETFs.
What's driving this growth, who are the main investors and how do you pick an ETF from the smorgasbord of available options? Let's take a look.
What are ETFs?
Australians have more than $350 billion invested in more than 450 exchange traded funds (ETFs). New funds are being launched all the time and it's estimated that by 2027 Australian investors will be able to pick from more than 500 ETFs.
What's driving this growth, who are the main investors and how do you pick an ETF from the smorgasbord of available options? Let's take a look.
ETFs are managed funds listed on the Australian Securities Exchange (ASX).
Your money is pooled with that of like-minded investors and spread across a range of underlying assets. The fund manager does the hard yards, creating and managing the fund's portfolio on your behalf and, in return, fund investors pay an annual fee.
Two game changers have made ETFs especially attractive: cheap online broking and the rise of 'index' investing, an approach also known as passive funds management.
ETFs charge super-low fees
With index investing, a strategy championed by fund manager Vanguard, the fund doesn't aim to beat the market. Instead, it aims to match the performance of a given market index.
This approach keeps costs down. As a result, ETF fees can be as low as 0.03%.
So if you have, say, $5,000 invested in an ETF, you could pay as little as $1.50 annually in fund fees.
Who's investing in ETFs?
Australian investors have flocked to ETFs, attracted to the low cost, diversification and low capital requirements they offer.
Rory Cunningham, senior manager of investment products at the ASX, says: "We are seeing strong momentum in the Australian ETF market, with an expanding range of products providing investors with greater choice and flexibility."
According to a Vanguard study, investors across the board are taking up ETFs, but it is younger Australians who are especially keen.
It turns out that one in four (26%) of all current investors holds units in ETFs, although this varies widely between generations.
As the chart shows, two in five (42%) Gen Z investors (14-29) hold ETFs compared with 36% of Millennials (29-44), one in five (19%) Gen X investors (45-60) and one in 10 (11%) Baby Boomers (60-plus).
Daniel Shrimski, Vanguard's managing director of Asia Pacific, explains the appeal of ETFs for young investors.
"Our research shows younger Australians are increasingly embracing investing and using ETFs. In many ways, they're recognising what Vanguard's founder Jack Bogle was talking about.
"They understand the importance of investing for the long term and keeping costs low. And to do that, they're not looking for a needle in the haystack, they're buying the whole haystack."
Shrimski adds that younger investors are using ETFs because they're simple, low cost and provide broad market exposure in a way that's easy to understand and stick with over the long term.
"We're seeing this trend in our own business, with strong growth in the number of younger Australians using ETFs to work towards their goals and build long-term wealth."
That said, Shrimski notes that ETFs are a simple, low-cost way for investors of all ages to build long-term wealth.
The four ETF families
A useful starting point in deciding which ETFs may suit your goals is being able to recognise the four main types of ETFs, bearing in mind there can be overlap between the different families listed below.
1. Core index ETFs
For many investors, a 'core and satellite' approach can be useful.
This involves holding key assets, such as Australian and international shares, at the heart of your portfolio, then adding smaller holdings in satellite investments such as niche or themed ETFs.
ETF manager Betashares found index funds remained the firm favourite among Australian investors in the first half of 2026, notching up $27.5 billion in inflows compared to just $2.4 billion across active funds.
Across these inflows, investors favoured international shares, which attracted $13.7 billion in investor money in the first six months of the year. This was followed by Australian equities ($8.8 billion) and fixed income ETFs ($4.7 billion).
Drilling down further, a handful of ETFs, all of which are index funds, led the field for attracting serious money during the first half of 2026.
2. Active ETFs
The rise of index ETFs has drawn attention to whether actively managed funds, which aim to beat the market, earn returns that justify their often higher fees.
The annual S&P SPIVA Scorecard, which tracks the performance of active fund managers, has consistently found that most actively managed funds fail to outpace the market. Plenty don't even match market returns.
The rate of outperformance generally declines over longer timeframes, such as 10 years.
Despite this, Darren Connolly, CEO of Investment Markets, believes both active and passively managed funds can have a place in portfolios.
"Passive ETFs remain a very effective, low-cost way to gain broad market exposure and are well suited as core portfolio holdings. Active ETFs can add value in areas where skilled managers have the opportunity to outperform or manage risk more effectively.
"The key is understanding what you're paying for and whether the strategy complements your overall portfolio."
3. Thematic ETFs
As the ETF market has become more competitive, several fund managers have branched out from the basics and launched ETFs based on specific themes.
These can range from the video game market through to the space economy.
Themed ETFs can give investors an opportunity to put their money into a trend or niche market they have a particular interest in or strong views about.
But not everyone is a fan.
Scott Phillips, chief investment officer of Motley Fool Australia and author of The One-Page Investing Plan, says: "I almost always eschew thematic and similar ETFs. Unless you've done the research on each of the companies in the ETF, how can you have a view on the value?"
Connolly, however, believes themed ETFs can be useful, but says they should generally "play a supporting role rather than form the core of a portfolio".
He adds: "Investors need to distinguish between long-term structural themes and short-term market excitement.
"It's easy to be drawn to a compelling story, but successful investing still comes back to diversification, discipline and maintaining a long-term perspective."
4. Specialty ETFs
One of the often-overlooked upsides of ETFs is that they have opened the door for retail investors to access markets such as government and corporate bonds, which can require significant sums if investing directly.
They also provide access to assets that can be difficult to trade directly, such as commodities or currencies.
There are also ETFs that invest in gold and cryptocurrencies such as Bitcoin.
Given the specialised nature of these ETFs, they can add to your satellite holdings but ideally shouldn't act as the core of a portfolio.
New trends in ETFs and the big drivers
Darren Connolly of Investment Markets says investors are increasingly using ETFs to express specific investment views, rather than just buying broad market exposure. That said, he reports seeing continued demand for income-focused ETFs as investors look for reliable cashflow in a higher cost-of-living environment.
"At the same time, AI and technology-related ETFs continue to attract attention," he says.
"While infrastructure and energy transition themes are gaining momentum as investors look for long-term structural growth opportunities."
Phillips has a more nuanced view. He suggests that some ETF providers create new ETFs "not because they think they'll be good for you, but because they think they can attract investors to invest in them".
"Sorry, ETF providers, but you know it's true," says Phillips. "That doesn't mean [these ETFs] can't be good investments - just remember the incentives at play."
He points to new trends such as AI, space, income - and previously, things like Bitcoin, lithium and renewables, that have been 'hot'. "Be careful about getting sucked into the hype," adds Phillips.
How to choose the 'right' ETF
With just a handful of ETFs, it's possible to put together a diverse portfolio. The question is, with hundreds of ETFs to pick from, how do you narrow down the choice? Here's what the experts say.
Connolly provides a basic framework. "Start with your investment objective rather than the ETF itself. Investors should understand what they're trying to achieve, whether that's long-term growth, income, diversification or exposure to a particular sector."
From there, Connolly suggests looking at factors such as the underlying asset holdings, fund fees, liquidity, how closely the ETF tracks its benchmark and whether it adds something to your portfolio.
Phillips says he applies three tests when it comes to picking ETFs. "I want them to be broad, index-based and low cost," he says. "That gives the best diversification and keeps one of the biggest drags - costs - from eating too much into your returns."
Does size matter?
The more popular ETFs in Australia tend to be the biggest and they're managed by the goliaths of the industry. At one end of the spectrum, the Vanguard Australian Shares Index ETF (VAS) muscles in at a hefty $27 billion.
At the other end, the ETFS Global Lithium Miners ETF (VOLT) weighs in at just $503,000. To be fair, VOLT gives exposure to global lithium mining companies so it has a far narrower focus than, say, VAS. Even so, size can matter.
Phillips explains that larger ETFs are likely, although not guaranteed, to have lower costs over time than their smaller counterparts. But when it comes to a fund closing its doors because it is small, he notes, "As long as an ETF provider is reputable, you will be able to redeem your units in the fund. There's no need to worry too much".
Phillips adds that a fund closure could "cause a tax event, but your capital should be secure".
Connolly believes larger ETFs "generally have stronger liquidity and lower closure risk", but he adds that a smaller ETF isn't necessarily a poor investment.
"Investors should also consider who the issuer is, the level of investor demand and whether the ETF provides unique exposure," says Connolly.
"While smaller funds are more likely to close, closures are usually managed in an orderly way and don't typically result in investors losing their capital."
Building a portfolio of ETFs
Connolly says that while diversification is "one of the biggest benefits of ETFs", it is easy to accidentally double up on holdings.
He cites the example of an investor who may own an Australian share ETF and a dividend ETF, with each potentially holding many of the same companies.
"It's important to look through the underlying assets and ensure each ETF has a clear role within the portfolio, rather than simply adding more of the same exposure," he says.
Discovering what an ETF invests in is easy. Most list current holdings - and the proportion of the total portfolio they represent - on the fund's webpage.
Are some trends falling out of favour?
Phillips points out that while almost all ETFs are growing, changing trends and investor focus mean some are less popular than they were.
"ETFs focusing on cybersecurity, and sustainability, for instance, are attracting a lower share of new investment."
Connolly believes that some of the more niche, thematic ETFs that benefited from market hype have seen interest cool as investors refocus on the fundamentals.
"We're seeing a shift back towards diversified core exposures and strategies with clear long-term investment cases, rather than chasing the latest trend," he says.
Top five share trading platforms and their brokerage fee structures
If you have limited funds to invest in ETFs, two options may be worth a look:
- Micro-investing apps like Raiz and CommSec Pocket are backed by a basket of ETFs. You can get started from as little as $5 with the likes of Raiz or $50 with CommSec Pocket. The downside of such small amounts is that it's going to be a long road to build wealth.
- Low-cost platforms such as Vanguard Personal Investor let investors get started with smaller sums. With Vanguard, for example, you can invest with as little as $200 and pay $0 brokerage. While it's possible to invest in the top 300 ASX-listed shares with Vanguard Personal Investor, your choice of ETFs is limited to those managed by Vanguard.
If you prefer to directly buy and hold the ETFs of your choosing, you're going to need an online broker.
Setting up an account is easy. And to start trading you simply transfer money from your everyday account to your online broking account. Your first purchase of any ETF must be at least $500.
This is the 'minimum marketable parcel'. So you'll need at least this amount plus the cost of brokerage in your broking account.
From here you can usually top up your holdings with smaller purchases.
Some platforms charge $0 brokerage. It can sound like a good deal but you'll likely 'pay' in other potentially less transparent ways, such as less favourable buy/sell spreads, mark-ups on foreign currency conversions, inactivity penalties, or account maintenance fees. Opting for a broker that charges a set fee can make it easier to compare apples with apples.
That said, price isn't the only aspect to consider. How comfortable you feel with a broker's platform or app and the availability of the latest research can play a role in your choice.
Several of the big banks have online broking platforms of their own, and they have become more price competitive in recent years. nabTrade charges $9.95 for trades up to $1,000 on both ASX and international trades.
Westpac Share Trading charges $4.95 on local and overseas trades up to $1000.
CommSec charges $5 on trades up to $1000 but from there the price rises to $10 on trades worth $1000-$3000. Trades on global markets are priced at $US5 or 0.12% (whichever is greater). That said, CommSec is currently offering up to 30 trades, brokerage-free for new customers.
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