Exchange-traded funds (ETFs) have become a common way for people in Australia and Europe to access diversified investment exposure. This guide is written for beginners and explains what ETFs are, how they differ from other investment products, and which factors to understand before getting started. It is general information only and not financial advice.
What is an ETF?
An exchange-traded fund (ETF) is a pooled investment vehicle. Many individual investors buy units in the same fund, which then holds a portfolio of underlying assets. Units can be bought and sold on a stock exchange during market hours.
Core characteristics
- Units are traded on an exchange, similar to shares.
- The ETF usually tracks an index, theme, or specific exposure.
- Investors typically receive indirect exposure to many holdings at once.
- Fees are usually charged as an annual percentage (management fee).
How ETFs differ from shares and managed funds
For beginners, it can help to compare ETFs with buying individual shares or using traditional managed funds.
| Feature | Individual shares | Managed fund | ETF |
|---|---|---|---|
| Access to diversification | Builds slowly, trade by trade | Often diversified by design | Often diversified via index or basket |
| How you trade | Through a brokerage account | Often priced once per day | Traded on exchange during market hours |
| Typical fee structure | Brokerage per trade | Management fees, sometimes entry/exit costs | Management fee + brokerage when you trade |
Common ETF types in Australia and Europe
The specific options available depend on the exchange and country, but many ETF categories appear in both Australian and European markets.
- Track a large share market index.
- Provide exposure to many companies in one trade.
- Often used as a core portfolio building block.
- Focus on areas such as technology or healthcare.
- More concentrated exposure than broad index funds.
- May carry higher volatility.
- Hold bonds or income-focused assets.
- Often used for diversification and income streams.
- Value can still move up and down.
How ETF investing works in practice
In simple terms, investing in an ETF usually involves choosing an ETF, placing an order through a brokerage platform, and then holding units if the investment continues to align with your strategy and tolerance for risk.
High-level steps
- Consider whether investing, in general, is appropriate for you.
- Understand that investment values can go down as well as up.
- Research the ETF's objective, holdings, and risks using official documents.
- Use a brokerage account that provides access to the relevant exchange.
- Review your holdings periodically in line with your goals and risk appetite.
Fees to understand with ETFs
Cost structures matter when investing for the long term. With ETFs, there are usually two main fee areas to understand: fund-level fees and trading-related costs.
- Management fee: an annual fee expressed as a percentage of the fund value.
- Indirect costs: other expenses involved in operating the fund (described in fund documents).
- Brokerage or commission when buying and selling units.
- Bid–ask spread (difference between buy and sell prices).
- Potential currency conversion costs for cross-border investments.
Risks and considerations
All investing involves risk, including the possibility of losing money. ETF risks depend on the underlying assets, the fund structure, and market conditions.
- Market risk: the value of the ETF can go down.
- Concentration risk for very narrow or thematic ETFs.
- Currency moves if the ETF holds assets in another currency.
- Liquidity risk in less frequently traded ETFs or markets.
- Does this ETF match my time frame and risk tolerance?
- How would I feel if its value moved up and down sharply?
- Is my overall portfolio diversified, not just this one ETF?
- Have I read the official documents and risk sections?
Example: a simple ETF-based approach
Many educational examples suggest splitting money between different types of ETFs to create a blended exposure. The exact mix that may suit someone depends on their personal situation, goals, and preferences.
Hypothetical illustration only
For instance, some investors may learn about combining a broad market share ETF with a bond ETF as part of a diversified portfolio. This guide does not suggest that any particular mix is suitable. It is simply an example of the type of structure people might explore when researching.
Australian vs European context (high-level)
While the concept of ETFs is similar globally, specifics such as tax treatment, regulation, and available products vary between Australia and European countries.
- In Australia, ETFs typically trade on the ASX or Cboe exchange. Official product disclosure documents explain structures and risks.
- In Europe, ETFs may be listed on multiple exchanges and can be structured under different regulatory frameworks. Documentation and risk warnings should be reviewed carefully.
Questions to ask before starting
- Am I comfortable with the possibility of capital loss?
- Is my emergency or short-term money kept separate from investments?
- Do I understand the ETF's underlying index or holdings?
- What is my planned time frame for holding this type of investment?
- Would I benefit from speaking with a licensed financial professional?
This article is general information only and does not constitute financial advice, investment advice, legal advice, or tax advice. It does not consider your objectives, financial situation, or needs. Readers may wish to seek personalised advice from a licensed professional in their jurisdiction before making investment decisions.
This article is general information only and does not constitute financial, investment, legal, or tax advice. It does not consider your objectives, financial situation, or needs. You may wish to seek personalised advice from a licensed professional before making financial decisions.