How index funds and ETFs work (Australia)
Plain-English basics for people in Australia. This explains how things work and where to check the official rules. It never picks a product for you.
What a fund is
A fund pools money from many people and buys many investments at once. Your money buys units (or shares) of the fund, and each unit goes up and down with everything the fund holds. In Australia the common types are managed funds and exchange-traded funds (ETFs) listed on the ASX.
What 'index' means
An index is a list with a rule, for example the biggest companies on a stock exchange, such as the S&P/ASX 200. An index fund simply holds what is on the list, in the same proportions. Nobody inside the fund picks winners, which is why index funds usually charge less than funds where a manager picks shares (called active funds).
An index fund still falls when its market falls. Holding the whole list spreads the risk of one company doing badly, but not the risk of the whole market falling.
ETF or ordinary fund?
- ETF: traded on the stock exchange during the day like a share. You need a broker or platform account; you pay brokerage and the gap between buy and sell prices (the spread).
- Ordinary (unlisted) fund: you buy and sell units with the fund manager, usually once a day at that day's price.
- Both charge a yearly fee taken from inside the fund, shown as a percentage.
What to look at on the fund's own documents
- Which index or market it follows, and how many holdings.
- The yearly fee (and any entry or exit fees).
- Its size and how long it has existed.
- How closely it has followed its index after fees (the 'tracking difference').
- Whether income is paid out or kept inside the fund.
- The currency and any currency risk.
Regulator guide: ASIC's Moneysmart: how to invest. Also: Moneysmart.
General information, not a recommendation. This page explains how things work. It does not pick a product for you or say where to put your money, and it does not consider your goals or situation. For personal advice talk to a licensed adviser in Australia - a licensed financial adviser (on ASIC's Financial Advisers Register).
Frequently asked questions
- Can an index fund lose money?
- Yes. It falls when its market falls. It spreads the risk of one company doing badly, not the risk of the market falling.
- Which index fund should I buy?
- We don't recommend products. Compare the fund documents (index, fees, size, tracking) and, for personal advice, talk to a licensed adviser.
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