Some investors prefer exchange traded funds (ETFs) that track the market, like the Australian Securities Exchange (ASX) . They’re simple, accessible, and offer instant diversification.

These ETFs aim to mirror the performance of ASX indices, giving you exposure to a wide range of Australian companies. They’ve become popular with investors who value convenience and a hands-off approach.

But are they the right fit for you? In this article, we’ll explore how ASX-tracking ETFs work, their benefits, and things to consider. From just starting out to fine-tuning your strategy, understanding these ETFs can help you make informed choices.

Let’s get into it!

What is the ASX?

The ASX, short for the Australian Securities Exchange , is Australia’s largest stock market. It’s where companies list their shares, and investors trade them.

The ASX is home to some of the biggest names in business, like banks, miners, and healthcare companies. It also includes smaller, growing companies in Australia. This mix makes it a key player in Australia’s economy.

The exchange doesn’t just list shares – it also tracks how the market performs through indices like the ASX 200. These indices group companies by size or sector, helping investors measure performance at a glance.

As we’ve mentioned, ETFs that track the ASX often aim to match the performance of these indices. This makes the ASX a key reference point for many Australian long-term investors.

How do various ASX indexes differ?

ASX indexes group companies to track market performance. Two widely recognised ones are the ASX 200 and the ASX 300.

The ASX 200 tracks the largest 200 companies listed on the ASX. These companies represent about 80% of the market’s total value. This index focuses on established businesses like big banks, mining giants, and major retailers.

The ASX 300 includes the ASX 200 companies and adds 100 smaller companies. This broader scope captures around 85% of the market’s total value, including mid-sized and emerging businesses.

Here’s a quick comparison:

Feature	ASX 200	ASX 300
Number of companies	200	300
Market coverage	Around 80% of the total market value	Approx. 85% of the total market value
Focus	Large-cap companies	Large- and mid-cap companies
Company size	Well-established	Mix of large and smaller players
Diversification	Narrower, focuses on the economy's largest companies	Broader, includes growth companies
Risk profile	Generally lower, due to larger companies	Usually higher, due to smaller companies

While the ASX 200 is often seen as a benchmark for the Australian market, the ASX 300 can provide added diversification.

As mentioned earlier, many ETFs use these indexes as their benchmark. This can give investors an easier way to follow the market’s performance. The choice between them often depends on how much exposure an investor wants to smaller, potentially riskier companies.

How to invest in ASX index funds

If you decide to go down the ASX index fund route, here’s how to get started investing in Australia:

1. Understand your options

ASX index funds come in two main forms: traditional managed index funds and ETFs .

• Managed index funds : These are offered by fund managers and let you invest directly into a pool of assets that tracks an ASX index.
• ETFs : These trade on the stock exchange like shares and aim to replicate the performance of an ASX index.

2. Research ASX index funds

The next step is to look for funds that track indexes like the ASX 200 or ASX 300. Key details to consider include:

• Fees : Lower fees can help improve long-term returns.
• Performance history : Check how well the fund has tracked its index over time. But keep in mind that past performance isn’t always a reliable indicator of future results.
• Dividends : Understand how and when dividends are paid.
• Fund size and liquidity : Larger, more liquid funds are generally easier to buy or sell.

3. Open an account

• For ETFs : Open an account with an online broker or investing platform, like Pearler . These allow you to buy and sell ETFs directly on the ASX.
• For managed funds : Register with a fund manager or financial institution offering the index fund.

Choose a platform that suits your needs, whether it’s low fees, automation features, or ease of use.

4. Decide how much to invest

Set an amount that aligns with your financial strategy and goals. You can invest a lump sum, start small, or automate regular investments.

5. Buy your chosen fund

• For ETFs : Place a trade through your broker by entering the fund’s ticker code (for example, VAS for the Vanguard Australian Shares ETF).
• For managed funds : Transfer money to your account, and the manager will allocate your investment to the fund.

6. Consider automation

Automation, like Pearler’s Autoinvest , can simplify the process. For ETFs, you can set up regular trades through some platforms. For managed funds, many providers offer recurring investment options.

7. Monitor your investment

While index funds are often considered hands-off, it’s still important to keep an eye on fees, dividends, and performance. Adjust your strategy as your goals or circumstances change.

What are the potential advantages of investing in ASX index funds?

ASX index funds are a popular choice for investors who value simplicity and diversification. Here are some of the potential benefits:

• Broad market exposure : Access a wide range of companies across different sectors and industries in Australia, potentially spreading your investment risk.
• Cost-effective investing : Enjoy the generally lower fees of passive funds compared to actively managed funds , which can help maximise long-term returns. (NOTE: always review the fund fees to ensure they are in fact lower.)
• Passive management : No need to pick individual stocks or monitor trends; these passive funds aim to follow the index.
• Transparent performance : Track established indices like the ASX 200 or ASX 300, making it easier to compare with market performance.
• Potential for dividends : Receive dividends from ASX-listed companies included in the fund, which can boost overall returns.
• Liquidity : ETFs are traded on the ASX, generally allowing you to easily buy or sell your investment when needed.

What are the disadvantages?

While ASX index funds have benefits, there are also potential downsides to consider. These may impact how well they suit your goals.

• Limited control : You can’t choose specific companies – you’re investing in all companies within the index, regardless of performance.
• No outperformance : Index funds aim to match market performance, so they won’t outperform like some actively managed funds might.
• Market volatility : These funds mirror the market, meaning their value can drop during downturns like the overall index.
• Exposure to all sectors : If certain sectors underperform, they can still impact your returns as the fund holds all index companies.
• Fees still apply : While often lower than active funds, index fund fees can still reduce returns over time.
• Limited flexibility : Some investors may prefer a more tailored approach that allows them to focus on specific sectors or strategies.

Does the United States have a version of the ASX 200?

Yes, the US has a similar index called the S&P 500 . It tracks 500 of the largest US companies.

While the ASX 200 focuses on Australian companies, the S&P 500 covers a range of major US industries and sectors. The S&P 500 represents about 80% of the US stock market value, like how the ASX 200 represents Australia.

The S&P 500 includes more global-facing companies, given the international reach of many US firms. To better understand their differences, read our ASX 200 vs S&P 500 comparison article.

Both indices serve as benchmarks for their respective markets, reflecting overall performance and helping investors track market trends.

Whether investing locally or globally, understanding the differences between these benchmarks can help you make informed decisions.

What are some ETFs that track different ASX indexes?

There are several ETFs designed to track ASX indexes, offering investors a straightforward way to follow the market. Here are some popular examples:

• Vanguard Australian Shares ETF (VAS) : Tracks the ASX 300, providing broad exposure to large- and mid-cap Australian companies.
• iShares Core S&P/ASX 200 ETF (IOZ) : Follows the ASX 200, focusing on the 200 largest Australian companies listed on the ASX.
• BetaShares Australia 200 ETF (A200) : Much like IOZ, A200 also tracks the ASX 200, targeting large-cap companies.
• SPDR S&P/ASX 200 Fund (STW) : Another ETF replicating the ASX 200 index, focusing on large-cap equity. The ETF seeks to closely match the returns of the S&P/ASX 200 Index.

These ETFs differ in fees, dividend payout policies, and structure. As mentioned earlier, researching these details can help you decide which aligns with your goals.

Remember, these are just examples, not recommendations. Each ETF provides a unique way to track the Australian Securities Exchange, so it’s important to evaluate your options. If you need some support assessing what's available, consider seeking independent financial advice.

Are ASX index ETFs right for you?

ASX index ETFs offer an accessible way to invest in the Australian market, providing exposure to some of the country’s largest companies. With options that track different indices, such as the ASX 200 or ASX 300, you can choose the level of diversification that suits your goals.

Whether you’re drawn to the simplicity, cost-effectiveness, or potential for regular dividends, understanding how these ETFs work can help you make the right choice. The right approach depends on your needs, so take your time to research and select options that match your strategy.

Happy investing!