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5 steps to investing in an exchange traded fund (ETF)
Choose an ETF broker - you can compare options in the table below.
Sign up for a trading account – you'll need to provide personal details and proof of ID.
Research which ETF you want to invest in based on your personal goals.
Search for the name or ticker code of the ETF you want and place an order to buy the share.
Track the performance of your ETF.
Step 1: Choose a trading account
The first step is to choose the right online share trading platform.
If you're buying exchange traded funds (ETFs), you're most likely looking to buy and hold over the long term. This should be factored into your decision as to who you sign up with. Certain brokers will allow you to buy ETFs commission free, which is also something to consider.
The lower the brokerage the better, but it is important to match your broker with your needs.
For our top picks, we compared our Finder partners using a proprietary algorithm in August 2022. Keep in mind that our top picks may not always be the best for you. You're encouraged to compare for yourself to find one that works for you. Read our full methodology here to find out more.
Step 2: Sign up for a trading account
Once you've chosen a trading account, you'll need to sign up.
When it comes to signing up with a broker, it is usually free, but some accounts charge inactivity fees.
The registration process takes place online, and if you're a new customer, you'll need to provide your basic information, including the following:
Your name, address, date of birth and contact details
Your tax file number (TFN)
Proof of ID
Linked bank account details
Step 3: Research which ETF you want to invest in based on your personal goals
When it comes to any form of investing, it is important to match your goals, risk profile and objectives.
After all, there's no point in taking on more risk than required to achieve your personal goals.
When it comes to an ETF, this is especially true. ETFs are broken up into 2 categories: passive and active. Your financial goals could help determine which one you choose to invest in and what percentage of your portfolio you invest in either one.
If you choose to invest in a passive ETF, the managers will seek to replicate the performance of a broader equity market, sector or trend. Think of the ASX 200 or S&P 500. If you take a passive approach, you'll likely just track this market.
On the other hand, some managers will choose to actively invest. The aim here is to increase returns, but it will generally cost you more in management fees and can come with more risks.
Step 4: Search for the name or ticker code of the ETF you want and place an order to buy the share
Now that you've researched the ETFs you want to own, you need to buy them.
This will require you to search for the specific ticker code of the ETF you want to purchase and then you will need to order it.
When it comes to ordering shares, there are a few options depending on what your broker provides. But generally speaking, you can choose either a limit order or a market order. If you choose a market order, you are looking to purchase as quickly as possible, while a limit order is a predetermined price that you choose.
Step 5: Track the performance of your ETF
Now that you own the ETF, you should track its performance.
After all, it is important that it continues to align with your personal needs and objectives. If it's continuing as you hoped in step 3, you could keep investing in it. If it's underperforming, it might be time to sell.
But it is also important to give the ETF some time for your thesis to play out. Markets can be volatile in the short period, and they might not reflect the long-term potential of the assets you own.
How do ETFs work?
An exchange traded fund is a bundle of shares or options that is listed on a stock exchange that you can purchase through a single trade.
In layman's terms, it is a pooled investment security that typically tracks a market index, a theme, a commodity or other assets. The original ETFs were passive index funds, but over the last decade, the sector has exploded.
An example of an index fund would be the iShares Core S&P/ASX 200 ETF, a market-tracking ETF made up of the 200 biggest companies in Australia. Investors in this ETF own a small percentage of each company based on market weighting. So, larger companies like BHP and Commonwealth Bank make up a larger holding than say a smaller company like Corporate Travel Management.
Each ETF is allocated an ASX code and can be bought and sold by investors the same way that you would buy and sell shares.
The good thing about ETFs is they instantly create a diversified portfolio. By default, you own an entire section of a market, but you can easily add other assets including Australian shares, global shares, fixed income, debt, foreign currencies, commodities and metals.
The main difference between an ETF and a mutual fund is an ETF is listed on an exchange such as the Australian Securities Exchange (ASX).
Types of ETFs
The humble ETF has evolved from its start as a simple passive investing index. Nowadays, you can get an ETF for pretty much anything ranging from your more traditional passive approach to an active strategy, a thematic strategy and everything in between.
Here are the different ETF types you might want to trade:
Passive ETFs
Also known as indexed ETFs or index funds, these funds aim to replicate the returns of a specific index or benchmark. For example, you may want to invest in a fund that tracks the performance of the S&P/ASX 200 (Australian stock market) or the S&P 500 (US stock market).
Active ETFs
Also referred to as exchange traded managed funds (ETMFs), active ETFs aim to outperform the market or a particular index. These sometimes come with a higher level of risk and usually have higher management fees.
Factor and smart beta ETFs
These combine both active and passive strategies. They typically track an index but factor in additional variables, such as a higher weighting of smaller companies. Smart beta ETFs track non-traditional indices designed to invest in a selection of company stocks based on their own set of rules. The idea is to outperform the market.
Structured and synthetic ETFs
Synthetic ETFs are where things start getting a little bit more complex.
ETFs access investment assets in 2 ways: physically or synthetically. ETF issuers of a physical (or standard) ETF have purchased the underlying assets on the index it aims to replicate.
Structured or synthetic ETFs try to replicate the performance of their underlying assets through the use of derivatives. This is because it's not always practical to hold physical assets. For example, gold or commodity ETFs are often synthetic due to the fact that storing large amounts of gold is often difficult. Instead of investing in an actual lump of gold, you're investing in a contract that promises returns based on the commodity's price movements.
What is a derivative?
Derivatives are products that derive their value from underlying assets like commodities or shares. Instead of purchasing a physical asset, it is a contract with an agreed-upon return based on the price of the movements of the underlying asset.
Warning: Because structured products may use complex investment strategies, they can be much riskier than a standard index ETF.
Commodity ETFs, or exchange traded commodities (ETCs), track the performance of an underlying physical commodity, such as gold, natural resources or agricultural products.
What are the costs of investing in ETFs?
When you invest in an ETF, the first cost you'll be aware of is the ETF unit price. However, there are other less obvious costs you need to be aware of. While ETFs typically charge lower fees than unlisted managed funds, this isn't always the case.
You should always read the PDS provided by the ETF issuer for full details of any fees that apply and how they will affect your investments. Here are the main costs to take note of:
Management fees. Just like any other managed fund, ETFs have management fees, which are sometimes referred to as the management expense ratio (MER). This fee is charged by the ETF issuer and is usually included in the unit price.
Brokerage fees. You'll need to pay brokerage fees whenever you buy or sell ETF units. These fees vary depending on the online broker you choose but usually start at around $10 or $20.
The buy/sell spread. This is the difference between the highest price you're willing to pay for an ETF unit and the lowest price at which a seller is happy to sell. The wider the spread, the more it can cost you.
Are ETFs good for beginners?
Generally speaking, ETFs can be an easy way for beginner investors to start investing. When it comes to ETF trading, they have a few beginner-friendly characteristics, including the following:
You don't have to be hands-on with your investing
If you choose a passive fund, you have diversification in one trade
They take away the problems of portfolio construction
They are low costs
Due to typical lower turnover, they can be tax efficient
All in all, ETFs can be a simple way to build towards a long-term financial plan. If you're looking for the best ETFs to invest in, click here.
Compare online ETF brokers
ETFs are bought and sold just like regular stocks, so you'll need to choose an online broker before you are able to invest.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Ask an expert: What are the main benefits of buying an ETF?
ETFs are a great option for those just getting started with investing as they give investors greater visibility to a number of companies and sectors. The stock market can be very intimidating for those just getting started, but ETFs offer diversification that can otherwise often take a long time to build if investing in individual stocks.
There is also generally a cost saving that comes with investing in ETFs as you're able to save on brokerage by buying units of a singular stock as opposed to paying for multiple trades for stock in every company you're interested in. You can also build a diversified portfolio of stocks more quickly – without needing a large amount of money upfront. Investing in ETFs also helps you reduce your risk, as you don't have all your eggs in one basket – or all your money in one company.
John Winters Superhero, co-founder
Do ETFs pay dividends?
Some ETFs pay dividends if the underlying company stocks pay dividends. However, it also depends on whether the fund manager chooses to pass this on, so check this first if this is a priority. This information should be available in the ETF's product disclosure statement.
Most of the time, ETFs will pay their dividends on a quarterly basis, though this isn't a rule. If you're interested in ETF dividends, check the yield, how often it's paid and whether you can reinvest the payments back into the ETF if you choose or if it's paid into your account.
How do I compare ETFs?
Like share prices, the price of ETF units can fluctuate day to day. However, many ETFs move up and down in line with the index they are tracking, so there are a few simple tips to keep in mind to help you get more out of your ETF investments:
Compare the price. ETF issuers regularly provide net asset value (NAV) information, often in real time. This is commonly referred to as the indicative NAV (or iNAV). By comparing it with the buy and sell (unit) prices quoted by your ETF broker, you can determine whether you will get value for money.
Consider limit orders. The iNAV can change quite quickly throughout the day as volatility in underlying markets drives it up or down. If you're investing in a volatile ETF, such as an ETC, it may be safer to place limit orders rather than market orders when buying or selling. This will ensure that you get the price you want.
Management fees. All ETFs charge management (MER) fees that are calculated as a percentage of your returns. The average fee is around 0.8% of your funds – make sure the fees match your returns.
Markets and sectors. ETFs have different themes. Some ETFs track large stocks from the US while others track small-cap stocks from Australia or specific sectors such as health, tech or renewables.
Choose carefully. ETFs come in all shapes and sizes, and carry different levels of risk depending on the type of assets they track. For example, while an ETF focused on resource stocks might offer the potential for higher returns, it also comes with a higher risk attached than an index that tracks the top 200 stocks.
Index fund investing. Index funds have become a popular way to invest relatively safely in the stock market. Most (not all) ETFs are types of index funds.
Diversify your portfolio. Buying units in just 1 ETF allows you to invest in many shares and asset classes at once.
Dividend income. If the underlying assets held by an ETF pay dividends, those dividends and franking credits (if applicable) will be passed on to you.
Relatively inexpensive. Creating a diversified portfolio of shares and other investment options usually requires a lot of money. But if you invest in ETFs, you can get started with as little as a few hundred dollars at a time or less if you use a micro-investing platform such as CommSec Pocket or Raiz.
Easy exit. Unlike some other types of investments that lock you into a contract for a fixed term, ETFs are open-ended meaning they are easy to transact with.
Cons
Losing money. If the underlying assets owned by an ETF don't perform as hoped, the value of an ETF will fall – and the value of ETF units you own will fall along with it.
Tracking errors. As we mentioned above, ETFs don't always exactly mimic the performance of the index they're designed to track, with fees, taxes and other factors potentially resulting in lower-than-expected returns.
Risks associated with individual ETFs. The underlying assets held by your ETF also come with their own risks, depending on what they are tracking.
International taxes. If you buy units in an ETF that is listed in a country other than Australia, you may need to pay foreign taxes. Make sure you're aware of all tax implications of an ETF before you commit any funds.
Frequently asked questions
Synthetic ETFs must feature the word “synthetic” in the product name.
The number of ETFs you should invest in will greatly depend on your own diversification strategy and the types of ETFs you buy. Diversification remains one of the most important rules of investing as it helps to reduce risks by ensuring there's no single asset that makes up a large portion of your portfolio. When it comes to buying ETFs and being diversified, if you buy a passive all-world ETF, you'd be capturing a large part of the market and you could be diversified in a single transaction. If, however, you buy more thematic ETFs, you are exposed to a sector or industry. You might be less diversified, meaning you will need to buy ETFs that match a different thematic.
No. The number of stocks purchased by an ETF will reflect the importance of each stock to the performance of the index. For example, an ETF would hold more shares in a large company like Rio Tinto or CSL than it would in the smallest companies in the top 200 index.
Yes, many robo-advisors offer access to diversified ETF portfolios. You can find more info in our robo-advisor guide.
Yes, there are ETFs available that track ASX indices and are traded on the ASX.
Yes, you can use a margin loan to fund the purchase of ETF units.
You can purchase as little as 1 share in an ETF.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
Kylie Purcell is the senior investments editor at Finder. She has completed a Certificate of Securities and Managed Investments (RG146) and specialises in investment products including online brokers, robo-advisors, stocks and ETFs.
Hi Alexander, I’m not aware of any Vanguard ETFs that pay monthly. Distributions are typically paid once a quarter or once a year. However it’s worth reaching out to Vanguard directly to double check this.
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are there any Australian Vanguard etfs that pay monthly?
Hi Alexander, I’m not aware of any Vanguard ETFs that pay monthly. Distributions are typically paid once a quarter or once a year. However it’s worth reaching out to Vanguard directly to double check this.