Start Investing in ETFs

An ETF — Exchange-Traded Fund — is a single share you can buy on the ASX that itself holds a whole basket of investments. Buy one unit of a global shares ETF and, in that one trade, you own a slice of thousands of companies around the world.

Most ETFs are index funds: instead of paying a manager to pick stocks, they simply hold everything in an index (say, the 200 biggest Australian companies) in proportion to size. That makes them cheap, transparent and diversified — three things that matter enormously to a long-term investor. You can buy and sell them through any broker, just like an ordinary share.

Before a single dollar goes into ETFs, build your cash buffer. The common rule of thumb is to keep somewhere between six months and two years of living expenses in cash — in your mortgage offset account if you have one, or in a high-interest savings account. Where you sit in that range depends on how secure your income is and how much a bumpy year would rattle you.

Then invest only money you won't need for at least five to ten years. Shares can halve and take years to recover; the buffer is what lets you shrug that off instead of selling at the worst moment (see the crash question above). A simple structure: emergency cash first, then a regular automatic investment of whatever your budget genuinely spares — the habit matters far more than the amount.

You buy ETFs through an online broker — sign up, transfer money, type in the ticker, and buy. The main decision is which broker, and the key distinction to understand is how your units are held:

• CHESS-sponsored: the units are registered against your own Holder Identification Number (HIN) on the ASX's official register. They're legally yours, independent of the broker — if the broker disappears tomorrow, your holdings are untouched and you simply move your HIN to another broker.
• Custodial: the broker (or its custodian) holds the units on your behalf and you own a claim against them. Usually cheaper, and fine in practice with reputable operators — but you're trusting the custodian's paperwork, and moving away or handling estates can be clunkier.

For a long-term nest egg, many Australians prefer the extra peace of mind of CHESS sponsorship. For fees and features, PassiveInvestingAustralia maintains an excellent comparison table of Australian trading platforms — worth ten minutes before you commit.

In practice, most people making regular monthly investments gravitate to brokers with low (or zero) fees and automated recurring buys — Betashares Direct, Stake and CMC Markets are the popular picks. CMC is CHESS-sponsored (free for trades under $1,000/day); Betashares Direct and Stake's cheapest tiers are custodial. Don't overthink it: the broker matters far less than what you buy and how long you hold it.

Read this one before you need it — the answer is easy to agree with in a bull market and very hard to act on when your portfolio is down 30%. In short: nothing. You do nothing, and you keep buying.

• Don't sell. A crash only becomes a real loss the moment you sell. Every crash in history — 1987, 2000, 2008, 2020 — has so far been followed by a recovery to new highs; the people who were permanently hurt were mostly the ones who sold near the bottom and stayed out.
• Keep your regular buying going. If you invest a fixed amount on a schedule (see dollar-cost averaging below), a crash simply means your usual contribution buys more units at lower prices. The dips are where much of your long-run return is actually earned.
• Stop looking so often. Checking a falling portfolio daily is how good plans die. The market doesn't need supervision; your behaviour does.

The real protection is set up before the crash: only invest money if you won't be forced to sell. If a job loss, a medical bill or a house deposit could force you to cash out during a 40% drawdown, that money didn't belong in shares in the first place — keep it in cash savings (see "How much should I invest?"). Structure things so that a crash is an inconvenience on paper, never a forced sale.

The MER (Management Expense Ratio) is the annual fee the fund charges, taken quietly out of the fund each year. It sounds trivial — who cares about 1%? — but fees are the one part of your return that is guaranteed in advance, and they compound against you exactly the way returns compound for you. Charlie Munger called it the "tyranny of costs" for good reason.

Here's the same $50,000, left untouched for 20 years, assuming an 8% p.a. market return before fees. The only difference is a fund charging 0.04% versus one charging 1.20%:

That seemingly tiny fee difference quietly costs you $44,949 — with no extra effort or performance to show for it. The longer your timeframe and the bigger your balance, the more brutal the gap becomes. All else being equal, the cheaper fund wins.

Please, note, in most cases similar funds have similar performance and similar fees. The higher fees are usually for a reason: sector exposure, factor tilts, or active management. The point is to understand the trade-offs and make an informed choice.

When you buy global shares, you're also indirectly holding foreign currencies. An unhedged fund lets those currency movements flow through: if the Australian dollar falls, your overseas holdings are worth more in AUD (a tailwind); if the AUD rises, it's a headwind. A hedged fund pays to cancel out that currency effect, so you get closer to the local return of the shares alone.

For most long-term investors, unhedged is the common default — currency tends to wash out over decades, the AUD often falls when global markets fall (softening the blow), and hedging carries an ongoing cost. Hedged versions are a tactical choice, useful mainly if you have a strong view that the AUD will rise or you want to remove currency swings from a shorter-term goal.

Australian companies pay 30% company tax on their profits before paying you a dividend. A franking credit is a receipt for the tax already paid on your behalf, so the same profit isn't taxed twice. At tax time you add the credit to your income and then subtract it from your tax bill.

The practical upshot: fully franked Australian dividends are unusually tax-efficient. If your marginal tax rate is below 30%, you can even get some of that credit refunded. This is a genuine reason many Australian investors keep a deliberate "home tilt" toward local shares — it's a real, uniquely Australian advantage.

Turnover is how much of the fund's portfolio is bought and sold each year. Every time the fund sells a holding for more than it paid, it realises a capital gain — and that gain is passed on to you and taxed this year, even if you never sold a single unit yourself.

A plain index fund barely trades (turnover in the single digits), so it defers tax for years and lets your money keep compounding. A fund that reshuffles half its portfolio annually keeps triggering taxable gains, handing the tax office money that could have stayed invested. Low turnover is quietly one of the biggest tax advantages of simple index investing.

Tax drag is the slice of your return lost to tax while you're still invested — before you ever sell. It has two main sources:

• Tax on distributions: the dividends and income the fund pays out are taxed each year at your marginal rate (franking credits soften this for Australian shares).
• Tax on realised capital gains: when the fund trades, it realises gains that are passed through and taxed now (see turnover, above).

Two funds tracking a similar market can deliver quite different after-tax returns purely because one is more tax-efficient. High-yield and high-turnover funds drag the most, especially for higher earners investing outside super. Our ETF comparison tables. let you toggle to an after-tax view to see this effect.

Not rules, but common traps worth understanding before you buy:

• Thematic ETFs (robotics, battery tech, crypto, cybersecurity) — narrow bets on a single story, usually launched after the hype has run. High fees, concentrated risk, and often bought high and sold low.
• Narrow sector ETFs (just banks, just gold miners) — you're taking a big concentrated bet, often without realising how much of it you already own inside a broad fund.
• Chasing last year's top performer — today's winner is frequently tomorrow's laggard. Past performance is the worst reason to buy.
• Geared ("leveraged") and complex products — magnified risk and quirks that trip up beginners (see gearing, below).

None of these are "never" — but they're satellites at most, kept small, and only once you understand exactly what you're buying and why.

For a long-term core holding, the boring boxes are the ones worth ticking:

• Broad, rules-based index — hundreds or thousands of companies, weighted by size, not a manager's hunches.
• Low fees — a small MER and tight buy/sell spreads keep more of the return in your pocket.
• Large AUM (assets under management) — a big, established fund is liquid, cheaper to trade, and far less likely to be shut down and force a taxable sale on you.
• Low turnover — for tax efficiency, as above.

Get those right and you've covered most of what actually drives long-run outcomes. Our low-fee and top-100-by-AUM lists are a good place to start screening.

Factor investing tilts a portfolio toward measurable, research-backed characteristics that have historically earned higher long-run returns. The best-studied factors are value (cheap stocks), quality (profitable, stable, low-debt companies), size (smaller companies) and momentum (recent winners).

Instead of a manager's opinions, a factor fund follows a transparent rule — for example, "hold the cheapest third of the market." The catch is patience: factors can underperform the broad market for years at a time, and only reward investors who stick with them. They're best used as a considered tilt around a broad core, not as the whole portfolio. See the popular factor funds listed further down this page.

Gearing means investing with borrowed money to amplify your exposure. A geared ETF might hold $1.60 of shares for every $1 you put in. When markets rise, your gains are magnified — but so are your losses when they fall, and you keep paying interest on the borrowing the whole time.

Geared funds also suffer from volatility decay: because they reset their leverage regularly, a choppy, sideways market can grind their value down even if the underlying index ends up flat. They're a tactical tool for experienced investors with strong nerves — not a buy-and-hold core, and not where a beginner should start.

Dollar-cost averaging means investing a fixed amount on a fixed schedule — say $1,000 on the first of every month — regardless of what the market is doing. When prices are high your $1,000 buys fewer units; when prices fall it buys more. Over time you accumulate at an averaged-out price, without ever needing an opinion about where the market is headed.

Its real power is behavioural. DCA removes the two decisions that ruin most investors — "is now a good time to buy?" and "should I wait for a dip?" — and replaces them with an automatic habit that keeps running through booms, crashes and everything in between. For most people investing out of a salary, it's also just the natural shape of investing: money arrives monthly, so it gets invested monthly.

If you receive a windfall — an inheritance, a bonus, proceeds from a sale — should you invest it all at once or drip it in over months? The research answer is clear: investing the lump sum immediately has beaten dripping it in about two-thirds of the time, simply because markets rise more often than they fall, and money on the sidelines misses that growth. "Time in the market beats timing the market."

The honest caveat: the lump sum also owns the full downside if a crash lands the week after you invest — and a bad early experience can scar someone off investing entirely. If you know you'd struggle to sleep, spreading the windfall over 6–12 scheduled parcels is a perfectly respectable price to pay for staying the course. Just set the schedule in advance and stick to it — don't let it morph into waiting for a dip.

Note this dilemma only applies to windfalls. Investing your salary as it arrives isn't really "DCA vs lump sum" — you're investing each dollar as soon as you have it, which is the lump-sum logic, applied monthly.

Domicile is where the fund itself is legally based — and it matters more than it sounds. An AU-domiciled ETF (IVV, VGS, VAS…) is an Australian trust: it reports in AUD, handles distributions through the Australian tax system, and everything lands neatly in your tax return (often pre-filled).

A US-domiciled fund — bought on a US exchange, or cross-listed — drags you into US paperwork: a W-8BEN form (renewed every three years) to reduce US dividend withholding tax, and potential exposure to US estate tax on holdings above certain thresholds if you die owning them. None of it is fatal, but it's friction a beginner doesn't need — and the popular Australian ETFs give you the same exposures without it. Note that an AU-domiciled fund holding US shares (like IVV) is still AU-domiciled — the fund deals with the US tax layer for you.

Everything listed on OzFinn is AU-domiciled — every fund in our comparison tables trades on the ASX under Australian rules, so you can compare them without worrying about this distinction.