Exchange Traded Funds (ETFs) first appeared in 1993 as an improved investment opportunity for investors looking for diversification offered by passive income investing following a market index, such as the US S&P 500. Prior to that time investors were limited to investing in Mutual Funds.
Mutual funds are bought and sold directly from the company managing the fund or from online or full-service brokers. While mutual funds offer the same diversification with index investing, ETFs offer significant advantages. Mutual funds can only be bought or sold at the end or the trading day, while ETFs trade like stocks and can be bought or sold anytime during the day. The price of a mutual fund does not change until trading ends while ETF prices fluctuate with the price of the index or the stocks within the fund. ETFs typically have lower fees associated with the fund.
The market for ETFs quickly expanded to mimic mutual funds that followed specific sectors, countries, bonds, or characteristics like dividend yields and high growth or value stocks.
With about 258 ETFs now available on the ASX investors now have diversified exposure to match individual preferences, including the top ten holdings in a specific ETF.
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From the wide variety of offerings, we have selected some of the best ASX ETFs with diversified exposure to the following:
Best Dividend ETFs
These ETFs have only dividend payers in the portfolio of holdings. There are differences in the selection of holdings. Here are two of the best dividend ETFs on the ASX.
Vanguard Australian Shares High Dividend Yield (ASX: VHY)
VHY is the largest high dividend yield ETF on the ASX, making liquidity one of the funds advantages, along with low cost and portfolio selection. VHY tracks the FTSE Australia High Dividend Yield Index but is selective on component stocks it includes.
Vanguard’s selection criteria focus on forecasted, not historical, dividend yields. To minimise risk VHY does not allow more than forty percent of holdings from one industry. The top ten holdings from the total of around seventy are available on the Vanguard website, and include all four of Australia’s big four banks, BHP, RIO, Telstra, and Macquarie.
The VHY has been on the /ASX since 2011 and the share price has risen 43.1%. The ASX website lists the fund’s annual yield at 4.44%.
Source: ASX 26 March 2024
The fund’s total returns closely match the performance of its benchmark index.
VHY Total Returns per annum Since Inception
Source: Vanguard Website 26 March 2024
SPDR MSCI Australia Select High Dividend Yield Fund (ASX: SYI)
SYI has only 32 holdings in its portfolio, tracking a different index – the MSCI Australia Select High Dividend Yield Index.
In contrast to VHY, the SYI focuses on stocks paying higher dividend yields than the broader market, fully franked. Liquidity is a major advantage of ETFs, so SYI merits a place on the best dividend ETFs on the ASX as the second largest at $444 million in assets under management compared to $3.5 billion at VHY.
SYI’s total returns trail its benchmark index by small margins.
SYI Total Return per annum Since Inception
Source: SPDR Website 26 March 2024
The fund listed on the ASX with the share price rising 16.2%. The ASX website lists the fund’s Annual Yield at 4.86%.
Source: ASX 26 March 2024
Best Commodities ETFs
Commodities are a good hedge against inflation as the price of the commodity will rise with market conditions, but commodities ETFs pose a challenge for investors. Since some commodities, like oil, are priced independently of the oil-producing sector, the ETF industry introduced “synthetic” ETFs where the ETF deals in derivative or futures contracts rather than taking physical possession of the commodity, which would be impractical in most cases. For retail investors, some analysts recommend commodity ETFS on the ASX that invest in the stocks of commodity producing companies.
Global X Battery Tech & Lithium ETF (ASX:ACDC)
This is one of the few commodities ETFs on the ASX to include exposure to Aussie commodity producers. ACDC’s portfolio is a mixed bag of electro-chemical storage technology , electric vehicle, and battery manufacturers, and the three biggest lithium miners on the ASX Pilbara Minerals (PLS), and Mineral Resources (ASX: MIN).
The benchmark index is the Solactive Battery Value-Chain Index. ACDC has twenty-nine companies in its portfolio, including well known names like BMW, Nissan, Panasonic, LG, and Tesla.
ACDC was listed on the ASX in 2018 with the share price up 81.1%.
Source: ASX 26 March 2024
ACDC Total Return Performance Table
Source: Global X Website
BetaShares Global Agriculture ETF (ASX: FOOD) Currency Hedged
Changes in the world’s agricultural sector are considered mega-trends. Australia lacks food producers global in scope, with the exception of agricultural chemical companies. The FOOD ETF tracks the Nasdaq Global ex-Australia Agriculture Companies Hedged AUD Index and includes the many of the world’s largest agricultural producers, manufacturers, and chemical companies.
FOOD manages $82.04 million dollars in assets. The portfolio includes US based Archer Daniels Midland, along with blue chip agricultural suppliers like John Deere.
Hedging in mega-global ETFs giving Aussie investors access to the world’s biggest and best companies ensures fluctuation in their investment comes from the stocks in the portfolio, not the strength or weakness of the US dollar.
FOOD listed in January of 2016, appreciating 33.5% since listing.
Source: ASX 10 April 2023
BetaShares provides an example of ETF’s subject to downturns in a sector. However, generally speaking, ETFs are meant for the long haul. Here are FOOD’s total returns over time.
Food Total Returns
Source: BetaShares Website
Best Energy ETFs
Since early man learned to produce fire, energy sources have grown and today are responsible for the modern economy as we know. ETFs in this sector allow Aussie investors to get instant exposure to dozens of the best energy companies in the world.
BetaShares Global Energy Companies ETF (ASX: FUEL) – Currency Hedged
FUEL is an example of an ETF whose stock price has benefited from the oil supply issues but may not qualify as a best buy over the long term, given the coming reported boom in EV sales. However, the global oil powerhouse companies are expanding into renewable energy and the world is highly unlikely to get along without petroleum-based products.
The COVID pandemic and subsequent lockdowns, border closures, and work at home environment weighed heavily on the fund, as even the largest oil companies faltered. Then came inflation, high interest rates, recession fears, and war. The stock price is still up 28.6% since listing in 2016. The ASX website has the Annual Yield at 4.65%.
Source: ASX 26 March 2024
Like FOOD, the FUEL ETF tracks the performance of the world’s largest oil companies outside Australia, hedging to protect Australian investors from fluctuations in the value of the AUD.
The index includes the following – ExxonMobil (NYSE: EOM) Chevron (NYSE: CVX) and Shell Oil (NYSE: SHEL), and
In addition to size, these global behemoths are more diversified geographically and control more operations in the petroleum supply chain.
FUEL”s benchmark index is the Nasdaq Global ex-Australia Energy Hedged AUD Index Nasdaq Global ex-Australia Energy Hedged AUD Index.
FUEL Total Return Since Inception
Source: BetaShares Website
VanEck Global Clean Energy ETF (ASX: CLNE)
Companies and governments around the world are focusing on clean energy for the future. The CLNE ETF is a passive fund, meaning that it tracks the performance of all thirty of the stocks in the S&P Global Clean Energy Select Index, although not all are equally weighted.
Companies include direct producers of clean energy along with clean energy technology and equipment companies. First Solar is the most highly weighted, with Solar Edge Technologies and Vestas Wind Systems among the top ten holdings.
CLNE listed on the ASX in March of 2021 with the share price dropping 36.2%
Source: ASX 26 March 2024
CLNE Total Return per Annum Since Inception
Source: VanEck Website
ETFs are geared for the long term, and CLNE is included as a best ASX energy ETF by virtue of its potential growth in a market gaining increased attention.
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Best Technology ETFs
The technology sector has delivered astounding innovations for decades. The ASX does not lack candidates for best buys in Energy ETFs .
BetaShares NASDAQ 100 ETF (NDQ)
The US NASDAQ index is home to many of the world’s largest and most innovative technology companies
The NDQ includes the top 100 companies in the NASDAQ, the NASDAQ 100 Index. The top three holdings are Microsoft, Apple, and Amazon.
Listing in 2015, the share price has appreciated 313.7%, an amazing record given the global technology share rout in 2022 and beyond.
Source: ASX 26 March 2024
Factoring distributions into the total return, NDQ has rewarded its day one investors with total returns of share price appreciation and distributions of 400. %.
Here are NDQ’a Total Returns Over Time Since Listing
Source: BetaShares Website
BetaShares Asia Technology Tigers ETF (ASIA)
ASIA is another ETF that includes the entire components of an index – the Solactive Asia Ex-Japan Technology & Internet Tigers Index. Holdings are weighted with the top holding going to Tencent Holdings, followed closely by Samsung, Taiwan Semiconductor, and Alibaba.
The index focuses on Asian technology companies, including online retailers and communications companies. Japanese companies are not included.
The fund came on the ASX in 2018 with the share price beginning to rise as the COVID pandemic hit. The price still rose to hit an all-time high in early 2021 before being crushed by the global technology selloff. The share price has begun a slow recovery in 2024, now up 37.2% since listing.
Source: ASX 26 March 2024
Since listing total returns have come to about 40 20%.
Source: BetaShares Website
Also from the BetaShares website, here is a total returns breakdown for ASIA over time.
For investors who want to follow the expert advice to diversify their holdings but do not have the time nor the temperament to pick their own stocks, ETFs provide an alternative to stock picking.
ETFs differ from mutual funds, which also enable diversification, in significant ways. The most important may be liquidity. The purchase price of an ETF varies during the day based on the fluctuations of the stocks in its portfolio. As such, they can be bought and sold at any time during the day from any online or full-service broker. Mutual funds cannot be bought or sold while the market is open.
There are ETS that track whole indices, like the S&P 500 and there are ETFs targeted to specific sectors, countries, bonds, dividend payers and more.
FAQs
What Are ETFs?
Exchange Traded Funds (ETFs) first appeared in 1993 as an alternative to mutual funds. Mutual funds can only be traded at the end of the day whereas ETFs can be traded throughout the day the same as stocks can. There are around 258 ETFs available on the ASX covering a wide range of markets.
How to Invest in ETFs in Australia
To invest in ETFs you will need to open an account with a regulated Australian broker. Many brokers offer commission-free trading on stocks and ETFs. Once you have your broker account you will need to research the various ETFs available and decide which ones meet your needs.
How Many ETFs Should I Invest In?
Many experts agree that between 5-10 ETFs is enough for most investors to diversify their portfolios. However, rather than the total number of ETFs, it is better to consider instead which sectors those ETFs provide exposure to.
