How the cheapest ETF investment strategy is minting millionaires

Total funds under management exceeded $300bn for the first time in September, amid forecasts of strong future growth as the number of ETFs available to buy on the Australian Securities Exchange swells beyond 400.

Amid strong investment returns across the board, an analysis of ASX data has found Vanguard dominates the list of the nation’s largest ETFs, providing the top two largest, and five of the top 13.

Most investors buy large, low-cost and broadbased ETFs, often with annual management fees below 0.08 per cent, as they diversify their assets across different markets. Just five of the 20 biggest ETFs focus on Australia’s share market, while 11 focus on international markets.

Increasingly it’s younger investors who are buying ETFs as the traditional financial strategy of buying a home becomes increasingly unaffordable.

“At the end of September, we surpassed the previous best year that we’ve had, so we’re certainly seeing the effects of the momentum into ETFs,” Mr Shrimski said.

“ETFs have democratised investing and has enabled it to be possible for all Australians.

“You can go and buy an Australian equities ETF, invest $10,000 and it costs you $7 (annually).

“Of course, markets have done well, and no doubt that helps.”

If you invested $10,000 into Vanguard’s Australian Shares Index fund a year ago, you would now have a paper profit of $1190, all for a $7 annual management fee.

But now there are so many ETFs, one of the big questions facing many new investors is how to choose the right one.

Unlike buying a single share, ETFs give investors instant diversification by spreading money across hundreds of stocks.

There are two broad ETF types – passive (index) funds that track a particular index such as the S&P 500 or the ASX 200, and active funds where investment managers choose particular stocks or themes. The list is long and quirky, as are ASX codes attached to some thematic ETFs – including ACDC for battery tech and lithium, HACK for global cybersecurity and DFND for a global defence stocks.

Investment company VanEck said the ETF industry was likely to grow to $400bn by the end of 2026, while Betashares predicted it would reach $500bn by 2028.

Mr Shrimski said research had found that 80 per cent of active share funds could not beat the index, and he quoted a well-known line from late US investor and philanthropist Jack Bogle, who founded Vanguard in 1974: “don’t look for the needle in the haystack – just buy the haystack”.

While index funds are the biggest ETFs, hot sectors and thematics are also vacuuming up investor dollars. The VanEck Bitcoin ETF, launched last year, and its funds under management have already passed $360m. Its investment return for the year to September 30 was 84.1 per cent, but as it tracks the price of the notoriously volatile cryptocurrency, it could potentially fall sharply.

Mr Shrimski said the ETF industry needed to work on literacy for investors and provide people with tools to help them make informed choices.

“If you have a financial adviser, that will help, but it’s difficult for a majority of Australians from an affordability and accessibility standpoint,” he said.

Financial adviser Helen Baker said the Warren Buffett maxim, “don’t invest in something you don’t understand”, held true for ETFs, as it did with any investment.

“Watch out buying the ETFs that are rising rapidly,” Ms Baker said. These were often higher-risk investments and could fall just as fast, she said.

Investment platforms such as Raiz, Stockspot and Vanguard Personal Investor allow people to start with small amounts – typically $1000 or less – and learn as they go.

A key rule, experts say, is to diversify across companies and countries, and understand whether you want safer low-cost index funds or seek the shooting stars of cryptocurrency, defence or semiconductors.

“Beginner-friendly options like all-in-one diversified ETFs can be an option to build a fully diversified portfolio in one trade,” Ms Baker said.

“It’s simple to get started. Open a brokerage account, choose your ETF, and decide how much to invest.”

Stockspot founder Chris Brycki said the smart money today was “chasing certainty, not hype”.

“ETFs don’t rely on a star fund manager or timing luck,” Mr Brycki said.

“The more investors understand how much hidden fees and underperformance have cost them, the faster the shift to ETFs has become.”

Mr Brycki said it was understandable that most people found choosing an ETF overwhelming, because “the ETF providers are great at promoting fads”.

“A handful of diversified ETFs is enough to build a world-class portfolio,” he said. “More isn’t better.”

Mr Brycki said people could start small, but should start today.

“We recommend $1000 to get started and then you can keep learning. I recently met one of our clients who made over $1m in profit recently. Even they started small and just kept topping up gradually over time.”

Automating your deposits and reinvesting was another good strategy, as was ignoring the noise, Mr Brycki said.

“Markets rise, fall and recover,” he said. “The biggest mistake is reacting emotionally or not sticking with your plan.”

Mr Shrimski said budding ETF investors should understand their appetite for risk.

“Look at the cost, look at the risk, and look at the track record, not just assume that all ETFs are equal and a safe, conservative low-cost investment,” he said.

This article first appeared in The Australian as How the cheapest ETF investment strategy is minting millionaires