Insights   •   Investing

10 Lessons We’ve Learnt From 20 Years of ETFs

This article was originally published on Money magazine. 

In Australia, exchange traded funds (ETFs) have been with us now for two decades. During that time, Australians have wholeheartedly embraced ETFs as a low cost, low maintenance and diverse investments. Today, the broader exchange traded product (ETP) market is valued at $116.5 billion, and investors can select from 224 different ETPs1

As ETFs celebrate their 20th anniversary in Australia, it’s worth a look at 10 important lessons from the past 20 years.

1. You don’t need to be rich to invest in ETFs

A 2017 ASX survey found the main reason Australians fail to invest is because they don’t think they have enough money to get started2. Yet ETFs have never been more accessible. 

You can choose from a direct investment through your online broker, head to a robo-advice platform such as Six Park or speak with your investment professional. Or, use a micro-investing platform like CommSec Pocket to get started in ETFs with as little as $50 and brokerage as low as $23.

2. A passive approach works

Most ETFs (though not all) are index funds that aim to mirror the returns of a particular market index. Over the years there have been plenty of naysayers who believe it’s better to try and outperform the market through an active approach. The catch is that consistently beating the market is a lot easier said than done.

The latest S&P DJI SPIVA Scorecard shows that over the past year, less than one in two actively managed funds outperformed the market4. Over the past five years, only 18% achieved above-market returns. And when it comes to a 15-year timeframe, only about one in ten actively managed funds outpaced the overall market. This reinforces the value of indexing as a low cost investment strategy.

3. Don’t put all your eggs in one basket

ETFs provide easy diversification – that’s part of their appeal. Remember though, diversification means different asset classes, markets and strategies. Owning different ETFs from multiple issuers may not give you the diversification you’re looking for if the issuers or funds are similar in other aspects.

4. It really is about time, not timing

Short term market movements tend to grab headlines. But history has repeatedly shown the value of taking a long term approach to investing. Dollar cost averaging is a simple strategy that eliminates the need to worry about market timing. You decide how much and how often you are going to invest – be it monthly, quarterly or every six months, then steadily drip-feed money into your ETF portfolio. It forces us to buy more when values are low, and less when values are high.

Taking advantage of a fund’s distribution reinvestment plan is another way to boost the compounding returns on ETFs.

5. Look at the total cost of ownership

ETFs charge exceptionally low fees, often just a fraction of 1%. That’s a plus for investors, however other costs contribute to the total cost of owning units in an ETF including:

  • Bid/Ask Spreads: Like all securities traded on the ASX, each ETF has a ‘bid/ask’ spread. This shows the difference between the highest price a buyer is willing to pay for an ETF and the lowest price a seller is willing to accept. A popular ETF will attract a wide variety of investors, and the increased competition narrows the bid/ask spreads, making trading more cost-effective.
  • Commissions:  Some wealth management platforms offer free trades on certain ETFs. However, a freebie is rarely a good reason to choose an investment. It could mean buying into an ETF with a high expense ratio or a wide bid-ask spread – and both can end up costing more than the savings on commissions.

6. Just because it’s listed doesn’t mean it’s an ETF

Financial products have always evolved, and we’ve seen this in recent years with a variety of  products coming onto the ASX such as actively managed funds, exchange traded notes and even listed investment companies that investors could mistake for ETFs. This reinforces the need to take a good look at any investment you select.

The ‘Exchange Traded Products’ page of the ASX website shows if an ETF tracks an index (and which index) or if a fund aims to ‘outperform’ (meaning it is an actively managed fund). Clicking on the fund link on the ASX site is an easy way to really get under the hood of an ETF. It’ll take you to a product page that explains the fund fees, historic returns, and the underlying investments to help you know exactly what you’re investing in – and decide if the ETF is right for you.

7. ESG is fast becoming a must-have

Investors across the world increasingly want to invest in line with their values, and over the past 20 years ESG (environmental, social and corporate governance) investing has become the norm rather than the outlier.

The COVID-19 pandemic is further changing attitudes. Many investors are realising they can no longer look the other way, and are ready to address ESG issues within their portfolios. To that end, State Street Global Advisors SPDR ETF is working with leading index providers to incorporate ESG data and analytics into our indices.

8. Keep your eyes open to markets outside Australia

The world is a big place, and Australia’s sharemarket represents just 2.1% of the global stock market5. Investing in international ETFs available in Australia, offers diversity plus exciting opportunities to invest in industries that aren’t well-represented on the ASX like pharmaceuticals and technology.  

9. Be mindful of when you trade

Here’s a handy hint: Try to avoid trading ETFs in the first and last 10 minutes of the day. When markets are opening and closing, there is generally more volatility in prices, and as a result spreads can be wider.

10. Experience matters

As ETFs rise in popularity, more fund issuers are coming into the market. But it’s always worth investing in experience.

State Street Global Advisors is the largest asset manager in Australia (based on funds under management). We were behind the first ETFs to be listed on the ASX back in 2001, and for two decades we have applied a rigorous, risk-aware approach built on research, analysis and market-tested experience. We navigated the global financial crisis, the market plunge of 2020, and a whole lot more in between. Today, we are able to draw on our heritage and experience to forge a path through the pandemic – and beyond.

One key take-out

Rewind 20 years back to 2001, and few of us could have predicted that ETFs would be such a game-changer for Australian investors. 

There is potentially something for everyone when it comes to ETFs – it’s just about knowing how they fit with your goals, your preference for risk and your investment timeframe. Don’t be afraid to ask for help – contact an ETF issuer to learn more about a particular fund. Or speak to your investment professional for tailored insights into how ETFs can make a difference in your portfolio.