Exchange Traded Funds (ETF’s) have been providing a diversified low cost option for investors for years, yet with the plethora of options now available to build one’s core portfolio, the challenge becomes finding an ETF(s) that suits your wants and needs without succumbing to the paradox of choice in the process.
There are literally hundreds of ETFs available to invest in, and lots of them actually offer something very similar. There are some considerations you can make which will help narrow down which ETF you decide to continue to investigate based on fees, the provider and how this aligns with your thesis and tolerance for risk.
Fees and Themes
There is an ETF to suit just about every thematic, such as:
Property
Fixed Interest
Infrastructure
Australian Equities
International Equities
Diversified (ready made)
Small-cap/mid-cap
Healthcare
Emerging markets
Sustainability
Growth
Defensive ETFs
Many ETF providers will have different ways of charging you for their service, and this can depend on how niche and specific the ETF is, which can in turn affect how much work goes into managing it. However, don’t let this turn you away, for the most part these fees are quite small and just allow the ETF to keep providing you with the ease and diversification you initially invested for. This management fee includes all relevant fees involved in managing the ETF, such as custodian fees, accounting fees, audit fees and index licence fees.
For example, Betashares charges an annual management fee of 0.04%. As per the example stated on their website, If you invested $10,000 in A200, over the course of a year, your investment would incur a total $4 in management fees. Each day, approximately 1 cent would be accrued ($4/365 days), and then deducted on a monthly basis, so after 12 months your investment would be worth around $9,996 (assuming no change in the market value of the fund holdings).
Some ETF providers will also include a performance fee, depending on how the fund performs in relation to its benchmark. Fees can fluctuate up or down depending on how the fund performs. It’s important to note that whichever broker you choose to invest with will also have their own fees. For example, Superhero offers commission free purchases on ETFs, whereas Commsec charges a brokerage fee on the purchase of ETFs.
Deciding what your ceiling is when it comes to management fees can help you to quickly sift through many providers or ETFs that providers offer. You may still wish to invest in a particular ETFs because you have a demand for what it offers despite the fees, but that bridge can be crossed when you get there.
Providers
While this post will primarily focus on some frequently encountered ETF providers and their main products, it’s important to remember that the world of ETFs is teeming with diverse options. The intent here is to shed light on the well-known names that investors often come across, each contributing their unique strengths and offerings to the ever-expanding ETF landscape.
Vanguard:
Vanguard offers 29 different ETF’s in Australia ranging from Fixed Interest, Property, Infrastructure, Australian Equities, International Equities and Diversified (ready made). Their website outlines the time horizon, risk appetite and fees. Some of their most popular products include;
Vanguard Diversified High Growth Index ETF (VDHG): Fees 0.27%
- Ready made ETF investing in 90% growth assets and 10% income producing assets (e.g. bonds)
- Suited for buy and hold investors seeking long term capital growth, and with a weir tolerance for risks associated with share market volatility.
Vanguard Australian Shares Index ETF (VAS): Fees 0.07%
- Australia’s largest ETF, exposure to the top 300 companies listed on the ASX
- Buy and hold investors seeking long-term capital growth, some tax-effective income, and with a higher tolerance for the risks associated with share market volatility.
Blackrock (ishares)
Blackrock offers 66 different ETFs providing exposure to a wide range of asset classes and regions.
ishares Core S&P/ASX 200 ETF (IOZ): Fees: 0.05%
- Exposure to the leading index of broad australian equities
- To be used as the core of the portfolio for essential domestic allocation.
- This product is likely to be appropriate for a consumer seeking capital growth with a medium to high risk/return profile. This product is unlikely to be appropriate for a consumer with a short investment timeframe.
ishares Yield Plus ETF (IYLD): Fees: 0.12%
- Low cost access to the australian investment grade corporate bond market
- Screens out corporate bond issuers involved in serious ESG controversies
- This product is likely to be appropriate for a consumer seeking capital preservation with a low to medium risk/return profile. This product is unlikely to be appropriate for a consumer as a whole portfolio solution.
ishares high growth ESG ETF (IGRO): Fees: 0.22%
- Rebalanced quarterly to its long term high growth strategic allocation
- 90% Equities and 10% fixed income exposure
- 40% exposure to the USA, 37.38% exposure to Australia.
- This product is likely to be appropriate for a consumer seeking capital growth with a medium to high risk/return profile. This product is unlikely to be appropriate for a consumer with a short investment timeframe.
State Street SPDR
State Street is an American global financial services holding company that offers 17 different ETFs ranging from basic asx trackers to resources, property, emerging markets and high dividend funds. Fees vary between 0.0945% p.a. For their highest market cap stock being the SPDR S&P 500 ETF trust, to 0.65% for their emerging markets carbon control fund.
SPDR S&P/ASX200 Fund (STW): Fees: 0.13%
- The very first ETF listed in Australia
- The S&P/ASX 200 is designed to measure the performance of the 200 largest index-eligible stocks listed on the ASX by float-adjusted market capitalisation. Representative, liquid, and tradable.
- A potential core Australian equity exposure for investors.
SPDR S&P/ASX 200 Resources Fund (OZR): Fees: 0.34%
- Unlike buying single stocks, investing in a sector may offer greater diversification and reduce concentration risk.
- Potential to benefit from favourable economic trends driven by global resources demand.
- The SPDR S&P/ASX 200 Resources Fund seeks to closely track, before fees and expenses, the returns of the S&P/ASX 200 Resources Index.
Betashares
Betashares offers 66 ETFs with their main three categories between defensive, growth and income. Betashares feature a lot more niche styled ETFs, giving investors the ability to own a range of companies that fall under more specific categories, including ETFs for cloud computing, crypto innovators and digital health and telemedicine, among others.
Australia 200 ETF (A200): Fees: 0.04%
- The lowest cost option in relation to management fees for an Australian Shares ETF available on the ASX*
- Use A200 as your core allocation to Australian shares, or to gain tactical exposure to Australian equities.
- Top holdings include BHP Group Ltd (11.6%), Commonwealth Bank of Australia (8.3%) and CSL Ltd (5.7%)
Cloud Computing ETF (CLDD): Fees: 0.67%
- In one trade, get diversified, cost-effective exposure to leading companies in the cloud computing industry, a sector that is heavily under-represented in the Australian sharemarket.
- CLDD’s index is constructed so that it prioritises companies that generate the majority of their revenues from cloud-based services.
- Holds companies such as Netflix Inc, Dropbox Inc, ZScaler Inc
FTSE 100 ETF (F100): Fees: 0.45%
- Access a portfolio of 100 Blue chip companies on the london stock exchange.
- Invest in a number of household names that are only accessible via the U.K. sharemarket, providing diversification benefits both in terms of company exposure and industry sectors.
- Top holdings of Shell (9.7%), Astrazeneca PLC (8.3%) and Rio Tinto PLC (3%)
You may notice a couple of ETF options have similar titles, or appear to be doing the same things for you by investing in them, but are priced differently. The difference lies in a variety of factors but are not limited to competition and marketing, index providers methodology and weighting and rebalancing. Even if two companies both claim to track the ASX200, there is almost certainly going to be variances in portfolio weightings due to fund specific criteria for including/excluding securities. Marketing can also play a role as providers can differentiate themselves through branding and selling their product more efficiently than other providers. This in turn can attract more investors considering investing in ETFs.
Does this mean I should just invest in the highest priced ETF then?
Not necessarily, the ETF for you will be different to the next person. Time horizon is an important factor to take into account due to appetite for risk and ability to bear expenses associated with the performance and management of the ETF that impact returns over time. The total cost of owning a particular ETF will vary depending on financial status as well, where the compounding effect has the potential to be more rewarding for a lower priced ETF that grows consistently.
When looking to invest in ETFs, investors can consider options aligned with their risk tolerance, investing thesis and fee threshold. As explored, there are hundreds of ETFs available on offer by more than just the fund managers mentioned above.
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