ETF
A fund holding a basket of assets that trades on the sharemarket like a single share.
An ETF pools money to hold a portfolio — often every company in an index — and lists the resulting fund on the exchange. Buying one unit gives you proportional exposure to everything inside it.
Most ETFs track an index rather than trying to beat it, which keeps management fees very low. That combination of instant diversification and low cost is why they have become the default for many investors.
Because they trade like shares, you buy and sell through a broker at market prices during trading hours, paying ordinary brokerage rather than fund application forms and unit pricing delays.
Three hundred companies in one trade
A single purchase of a broad Australian share ETF gives exposure to hundreds of listed companies. Building the same spread by buying each share individually would cost a fortune in brokerage.
The bit people get wrong
ETFs distribute income including capital gains realised inside the fund, so you can receive a taxable distribution in a year the unit price fell. The annual tax statement often arrives months after year end.
Common questions
Are ETFs safer than individual shares?
They remove the risk of any single company failing, but they do not remove market risk. A broad market ETF still falls when the market falls.
How are ETFs taxed?
Distributions are assessable income, often including franked dividends and capital gains components. Selling units is a separate CGT event on your own holding.
What fees do ETFs charge?
An ongoing management fee deducted from the fund, often between 0.04% and 0.5% a year for index products, plus brokerage each time you buy or sell.