ETFs – Pandemic Investors Pick

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ETFs (Exchanged Traded Funds) are a type of investment fund that is made up of investments that are tradeable on a stock exchange. ETFs are designed to track the performance of a particular index, commodity, bond, or basket of assets, much like managed funds.


Though in existence in Australia for 20 years now, ETFs have become ever more popular in recent years, with over $100 billion currently being invested in ETFs on the ASX. Self-lead investors have a penchant for the funds, in particular since the COVID pandemic. In one year, there was an 80% increase in the total value of ETFs. The younger generation now seems more comfortable with this form of investing.


Whilst ETFs are not the only products that invest this way, they have gained popularity because they generally invest in a broadly diversified basket of securities, have low costs, and offer transparency as investors can see the make-up (underlying securities) of any ETF daily. Another benefit is the flexibility for an ETF to be traded on an intra-day basis, which can present a benefit mainly for active traders.


Like all investments, ETFs come with risks, which include things such as concentration risk (where the underlying holdings may be concentrated to certain sectors, industries or regions), liquidity risk (particularly in niche ETFs or those investing in specific concentrated areas) and trading error (as any asset that is not the index needs to account for fees and trading costs, which can skew the asset from the index it is tracking). However, like other investments, if the ETF is aligned with the investor’s goals and investment philosophy, they can yield a good outcome.


For example, if we prescribe to the theory that markets work, that diversification reduces risk, and that time in markets (rather than timing markets) will lead to better long-term results, a well-diversified, low-cost ETF would offer good results.


Many of the risks of ETFs are overcome by having the assumption that when investing in any growth asset (i.e., an asset with shares and/or property underlying holdings), an investor should have a long-term investment horizon. For the investor population that holds ETFs in favour (Millennials & Gen Z), it can be argued that they have a long investment horizon in front of them, and this style of investing would seem well suited.



Teneale Laister (CFP® Professional, ADFS(FP), BCom(Fin, FP, Mgt)(Hons) is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.

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