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. Before that time, investors were limited to investing in Mutual Funds.
Mutual funds are bought and sold directly from the company managing a fund or from online or full-service brokers. While mutual funds offer the same diversification as index investing, ETFs provide significant advantages. Mutual funds can only be bought or sold at the end of the trading day, while ETFs trade like stocks and can be purchased 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 ETF market 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 have diversified exposure to match individual preferences, including the top ten holdings in a specific ETF.
Top Australian Brokers
- IG - Extensive product array and user-friendly platforms - Read our review
- eToro - market-leading social trading platform - Read our review
- IC Markets - experienced and highly regulated - Read our review
- Quadcode Markets - multi-asset CFD broker - Read our review
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 only have 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 fund’s advantages, along with low cost and portfolio selection. VHY tracks the FTSE Australia High Dividend Yield Index but is selective on component stocks.
Vanguard’s selection criteria focus on forecasted, not historical, dividend yields. To minimise risk, VHY does not allow more than 40 per cent of holdings in one industry sector. The top ten holdings from a total of around 70 are available on the Vanguard website. They include Australia’s big four banks, and BHP, RIO, Telstra, and Macquarie.
The VHY has been on the /ASX since 2011, and the share price has risen by 44%.
Source: ASX 3 April 2023
The fund’s total returns closely match the performance of its benchmark index.
VHY total returns per annum since inception:
Source: Vanguard Website 32 March 2023
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 significant advantage of ETFs. SYI merits a place on the best dividend ETFs on the ASX as the second largest at $434 million in assets under management compared to $2.6 billion at VHY.
SYI’s total returns trail its benchmark index by small margins.
SPY Total Return per annum since inception
Source: SPDR Website
The fund was listed on the ASX in 2014, with the share price rising by 193%.
Source: ASX 17 April 2023
Best Commodities ETFs
Commodities are a good hedge against inflation as the commodity price will rise with market conditions; however, 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. Here 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 have 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 – Allkem Limited (AKE), Pilbara Minerals (PLS), and Mineral Resources (ASX: MIN).
The benchmark index is the Solactive Battery Value-Chain Index. ACDC has 29 companies in its portfolio, including the well-known names BMW, Nissan, Panasonic, LG, and Tesla.
ACDC provides a good learning point for the disadvantage that mutual and exchange-traded funds share – low-performing stocks dragging down investor returns from higher performers. ETF providers try to minimise this by weighting stocks expected to perform higher in the fund. For example, Pilbara was the largest holding in 2022 when the fund was trailing lithium miners.
Source: ASX 14 April 2023
ACDC also trailed its benchmark index slightly.
ACDC Performance per annum
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 scope, except for agricultural chemical companies. The FOOD ETF tracks the Nasdaq Global ex-Australia Agriculture Companies Hedged AUD Index and includes many of the world’s largest agricultural producers, manufacturers, and chemical companies.
FOOD manages $141.4 million dollars in assets. The portfolio includes US-based Archer Daniels Midland with a market cap above $44 billion dollars and blue chip agricultural suppliers like John Deere with a market cap of $114.9 billion dollars.
Hedging in mega-global ETFs gives Aussie investors access to the world’s biggest and best companies ensuring 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 44% over the last six years.
Source: ASX 10 April 2023
BetaShares provides a chart showing cumulative total returns, not per annum.
Source: BetaShares Website
Best Energy ETFs
Since early man learned to produce fire, energy sources have developed and today are the lifeblood of the modern economy. ETFs in this sector allow Aussie investors 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 the best buy over the long term, given the coming reported boom in EV sales. However, global oil powerhouse companies are expanding into renewable energy, and it is improbable that the world will be able to get along without petroleum-based products completely.
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. The stock price is still up 36% since listing in 2016.
Source: ASX 17 April 2023
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) at $472.4 billion dollars; Chevron (NYSE: CVX) at $328.8 billion dollars; and Shell Oil (NYSE: SHEL) at $213.billion, and Woodside Energy Group (ASX: WDS) at around $67.78 AUD billion dollars.
In addition to size, these global behemoths are more geographically diversified and control more petroleum supply chain operations.
FUEL” s benchmark index is the Nasdaq Global ex-Australia Energy Hedged AUD Index Nasdaq Global ex-Australia Energy Hedged AUD Index.
Since coming on the ASX, the cumulative total returns from FUEL have been close to 50%.
FUEL Cumulative Total Return Since Inception
Source BetaShares Website
VanEck Global Clean Energy ETF (ASX: CLNE)
Companies and governments worldwide are focusing on clean energy for the future. The CLNE ETF is a passive fund, meaning it tracks the performance of all 30 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 was listed on the ASX in March of 2021, with the share price dropping 13.59% since then.
Source: ASX 17 April 2023
The Fund’s total return since inception is also in negative territory.
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.
Best Technology ETFs
The technology sector has delivered incredible innovations for decades. The ASX does not lack candidates for best buys in Energy ETFs in 2023.
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 ETF appeared on the ASX on 26 May 2015, with the share price appreciating 194.4% since inception.
The NDQ includes the top 100 companies in the NASDAQ, the NASDAQ 100 Index. The top three holdings are Microsoft, Apple, and Amazon.
Factoring distributions into the total return, NDQ has rewarded its early investors with total returns of share price appreciation and distributions of 240%.
Source: BetaShares Website
The share price is up about 20% year to date, rebounding strongly from the tech trouble in 2022.
Source; ASX 17 April 2023
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 onto the ASX on 18 September, with the share price beginning to rise as the COVID pandemic hit. It has not recovered in the face of the tech crunch and the slowdown in China.
Source: ASX 17 April 2023
Since listing, total returns have come to just under 20%.
Source: BetaShares Website
For investors who want to follow expert advice to diversify their holdings but don’t have the time or temperament to pick their 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.
Some ETFs track whole indices, like the S&P 500, and others target specific sectors, countries, bonds, and dividend payers.
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.
