ETFs: How to use them and what they cost

The number of Australians investing in ETFs is expected to top 3 million in 2026, with 411,000 first-time investors in 2025 alone, according to the 2025 Beta Shares/Investment Trends annual ETF Report. The report estimates ETFs now comprise 17% of the average investment portfolio, the highest amount on record.

Some of the most enthusiastic early adopters of ETFs were SMSF investors and their numbers continue to grow. According to the Class 2025 Benchmark Report, 34.1% of the nearly 182,000 SMSFs on their books hold them, up from 32.8% a year earlier.

As the number of SMSF investors in ETFs continues to grow strongly, tech-savvy millennials are leading the way. The average age of new adopters is under 40.

As you can see in the table at the end of this article, SMSF investors mostly use ETFs to gain exposure to global shares or as a passive investment in the broad Australian share market. But as the market expands, SMSFs are using ETFs to plug gaps in their portfolio, such as local and global bonds and commercial property.

The key benefits of ETFs are generally cited as convenience, liquidity, transparency and cost effectiveness. They provide instant diversification with one ASX transaction, with easy-to-locate online disclosure of underlying investments, fees and performance.

The main reasons investors give for investing in ETFs, according to the BetaShares/Investment Trends report, are:

• Diversification
• Simplicity of trading and portfolio construction
• Suitability as a long-term portfolio core.

What investments do they offer?

While passive index ETFs, which mirror a benchmark such as the S&P/ASX 200 Index, are still the most popular core holdings, there is a growing number of actively managed ETFs that target niche markets or strategies.

You can buy ETFs to invest in all the major asset classes – shares, property, cash and fixed interest, local and global – as well as geographic and industry sectors, such as emerging markets, healthcare and technology stocks.

As the market develops, thematic ETFs are becoming available, covering global companies in emerging sectors such as artificial intelligence (AI), robotics, cybersecurity, gaming, energy transition metals and cryptocurrency. High-income ETFs are popular, as are gold and precious metals, and ethical or sustainable investments, especially among younger investors.

You can also use ETFs to invest in infrastructure, commodities and currency, assets that were previously difficult for individuals to access.

With new products listed regularly, where is a new investor to start?

The answer is to know where you are going.

Have a game plan

It’s much easier to select investments if you know what you are aiming for. To use a football analogy, you won’t win the game by kicking the ball around without looking up to check where the goal posts are. The investment game is no different. You need to be clear about your goals and stick to your game plan.

If you are reading this, then it’s a safe bet that one of your goals is a financially secure retirement. To achieve that goal, you will need a diversified portfolio of investments designed to ride out market ups and downs along the way.

2026 SMSF calendar

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To create a portfolio that provides your desired level of capital growth and income when you need it, there are three factors you need to consider:

• Your age and stage of life
• Your investment timeframe
• Your appetite for risk (and aversion to short-term losses).

The answers to these questions will determine the percentage of your portfolio you allocate to higher-risk growth assets (shares and property) and lower-risk defensive assets (cash and fixed income).

Generally, the younger you are, the more weight you can give to growth assets in your core portfolio because you have time to ride out short-term market fluctuations.

Investors nearing retirement are generally advised to reduce risk by dialling down their allocation to growth investments. This is to ensure you have access to a steady income stream in retirement without having to sell down investments and crystallise losses during a market downturn.

But with today’s retirees facing the prospect of more than 20 years in retirement, some exposure to growth assets in the retirement phase is important.

In practice, your personal risk tolerance will determine the most appropriate mix of growth and defensive assets as you move through life.

ETF strategies to build your portfolio

ETFs can be a cost-effective way to build a diversified portfolio from the ground up, or to plug gaps and provide diversification to an existing portfolio.

Core-satellite strategy

A core-satellite strategy combines ‘core’ passive investments to gain exposure to a broad market, such as Australian or global shares, property and fixed interest, with ‘satellite’ investments in market sectors, regions, themes or difficult-to-access asset classes.

Core component

Core holdings are designed to be bought and held long term. The aim is to provide returns that track one or more market indexes in one low-cost transaction.

Active fund managers who aim to beat an index have a mixed track record, with many underperforming their benchmark index for lengthy periods. They also charge higher fees than passive index funds due to their high management costs and portfolio turnover. The upshot is that index funds often provide superior performance at a lower cost.

The traditional function of a core portfolio is to gain exposure to a range of asset classes so that poor performance in one asset class won’t have a catastrophic impact on your overall returns. You could construct your core portfolio in one hit with a diversified ETF that invests across the major asset classes. The more common approach is to invest in several ETFs, each with exposure to a single asset class.

Here are examples of the two approaches (for illustrative purposes only, these are not recommendations):

• Alongside its single-asset funds, Vanguard offers pre-mixed diversified ETFs with investments in shares for growth and fixed interest for income. Depending on your risk profile, you can choose between a Conservative, Balanced, Growth or High Growth Diversified Index Fund.
• iShares has core ETFs covering Australian shares, international shares, Australian fixed income, international fixed income and Australian cash. It also has a portfolio builder tool on its website that allows you to name an investment sum and allocate a percentage to each of the core ETFs. You will be given an aggregate fee for your final portfolio and a breakdown of underlying investments. If you invest through a financial adviser, you may be offered a core portfolio of these ETFs on an investment platform, but additional platform and advice costs will apply.

Alternatively, you can select core ETFs from various ETF providers and build your own core portfolio.

Satellite component

Once you have your long-term core strategy in place, satellite ETFs can be used to get exposure to sectors or regions that offer shorter-term opportunities.

For example, in 2025 surging prices for gold and silver led to a spate of new ETFs, with underlying investments in gold bullion or gold miners.

A satellite strategy can also be used to complement or plug gaps in your core holdings. For example, there are few opportunities to invest in AI and technology stocks in Australia. If you want to get exposure to the world’s leading technology companies but don’t want to pick winners, you could invest in a global technology ETF or a Nasdaq 100 Index ETF that includes big tech stocks such as Meta, Apple, Google and AI/software darling Nvidia. These ETFs also feature in the SMSF top 20 list below.

ETFs can also add otherwise difficult-to-access asset classes to your portfolio. Think international shares and bonds, but also private credit, infrastructure, commodities and currencies.

What do they cost?

ETFs are generally regarded as a cost-effective way to build a diversified portfolio or to add to an existing portfolio for three reasons:

• The management fees they charge are generally lower than the fees for comparable unlisted managed funds.
• Most ETFs are passive index funds, so management costs are low, as are portfolio turnover costs, because their underlying assets are not actively traded. Active and thematic funds tend to have slightly higher fees.
• Although you pay brokerage to buy and sell an ETF, they are less costly than buying a diversified portfolio of direct shares or listed securities with separate brokerage fees for each transaction.

Management fees, also referred to as the management expense ratio (MER), are deducted automatically from the fund’s value, not paid directly. You also need to factor in brokerage fees when you buy and sell an ETF and look out for bid-ask spreads (the difference between buy and sell prices). Some funds may also charge hedging fees, performance fees for outperforming a particular benchmark or hurdle and other indirect costs. You can find all of these on the fund’s website.

Growing competition in the market has put downward pressure on management fees, which typically range from 0.03% to more than 1.25% for actively managed/specialised thematic funds. The average fee is 0.53%.

The table below shows the management fees charged for the 20 most popular ETFs used by SMSFs as at 30 June 2025. The list is compiled by SMSF software provider Class, with the latest management fees available from ETF websites. Funds are ranked by the percentage of SMSFs on the Class platform holding these ETFs.

Management fees for the top 20 range from as low as 0.03% for the popular Vanguard US Total Market Shares Index ETF to 1.35% for the Magellan Global Fund (open class) ETF, which also has a 10% performance fee. However, if you exclude the Magellan fund, the most expensive is 0.55%, indicating that SMSF investors are aware of fees and keen to keep them low.

Table: Management fees of the top 20 ETFs held by SMSFs (30 June 2025)

Source: Top 20 from Class data as of 30 June 2025, sourced from 181,862 SMSFs that use Class software; Management fees from fund websites.

How do I compare ETFs?

If you are considering building a core portfolio with ETFs, or adding ETFs to improve diversification, check out the websites of the major Australian issuers first.

Don’t just look at management fees, but compare the underlying investments, index benchmarks and performance of like funds from different issuers.

There are around a dozen ETF providers in Australia, but the market (and the Class top 20) is dominated by Vanguard with 28.6% of the market by value, Betashares with 20.0%, BlackRock (iShares) with 18.6% and VanEck with 13.0%. After this, market share drops away sharply, to Global X (5.4%), State Street Global Advisers (4.7%) and Magellan 3.0%.