Exchange-traded funds (ETFs) have become the default starting point for many Australian investors, and for good reason: with a single trade you can own a diversified basket of assets, often at a very low cost. But “best ETF” is not a single answer — the right fund depends on what you’re trying to achieve, your timeframe, and how much risk you’re comfortable with.
This guide focuses on how to identify a strong ETF rather than naming specific tickers, because the best choice for a 25-year-old building a 40-year portfolio differs from that of a retiree seeking income. If you’re new to the concept, our pillar guide on how to invest in shares in Australia explains what ETFs are and how they trade on the ASX.
What Is an ETF, Briefly
An ETF is an investment fund that trades on the ASX like a share. Each unit represents a slice of the fund’s underlying holdings — which might be hundreds of Australian companies, global shares, bonds, or a specific sector or theme. Most ETFs are index funds, meaning they simply track a market index (such as the ASX 200) rather than trying to beat it, which keeps costs low.
To understand how ETFs compare with traditional pooled investments, see ETFs vs managed funds.
The Main Types of ETFs
Not all ETFs are alike. The most common categories Australian investors encounter are:
- Broad Australian shares — track a wide slice of the ASX, giving exposure to the local market in one holding.
- Global / international shares — track markets outside Australia, often the US or developed-world indices, for geographic diversification.
- Sector or thematic — focus on a single industry (technology, healthcare, resources) or theme. Higher potential upside, but far less diversified and more volatile.
- Bond / fixed income — hold government or corporate bonds, generally lower risk and lower return, often used to balance a portfolio.
- Dividend / income-focused — tilt towards higher-yielding shares, popular with investors seeking regular income. See dividend investing in Australia.
- Diversified / multi-asset — a single fund blending shares and bonds across regions, effectively a whole portfolio in one ticker.
What to Look For in an ETF
When you’re comparing funds, a handful of factors matter far more than recent performance headlines.
Fees (Management Expense Ratio)
The management fee, usually expressed as a percentage per year (the MER or expense ratio), is charged on your holding regardless of how the fund performs. Over decades, small differences compound into large ones. Broad index ETFs are typically among the cheapest; niche and actively managed ETFs cost more. Lower is generally better, all else being equal.
Diversification
More holdings across more companies and sectors means less exposure to any single failure. A broad-market ETF holding hundreds of companies is inherently more diversified than a thematic fund holding twenty.
What Index It Tracks
Check what the ETF actually holds and which index it follows. Two “Australian shares” ETFs can track different indices with meaningfully different make-ups. Read the fund’s fact sheet, not just its name.
Fund Size and Liquidity
Larger, well-established funds tend to trade with tighter buy-sell spreads and are less likely to close. Very small funds can be harder to trade at a fair price.
Distributions and Tax
ETFs pass through income (dividends, interest) as distributions, which are taxable. Australian shares ETFs may also pass through valuable franking credits — see franking credits explained. Consider how distributions fit your tax situation.
A Criteria Comparison Checklist
Rather than a league table of specific funds (whose figures date quickly), use this framework to score any ETF you’re considering:
| Criteria | What to check | Why it matters |
|---|---|---|
| Management fee | The annual % (MER) | Directly reduces your return every year |
| Diversification | Number and spread of holdings | Lower single-company risk |
| Index tracked | The underlying benchmark | Determines what you actually own |
| Fund size | Total assets under management | Larger funds are more stable and liquid |
| Buy-sell spread | Gap between buy and sell prices | A hidden trading cost |
| Franking / distributions | Income yield and franking level | Affects your after-tax return |
| Provider reputation | Track record of the issuer | Operational reliability |
Work down the list for each candidate. A great “core” ETF for most beginners scores well on low fees, broad diversification, large fund size and a well-known provider — the flashy thematic funds usually don’t.
Active vs Passive ETFs
Most ETFs are passive — they simply track an index and aim to match its return at very low cost. A growing number are active, where a manager tries to beat the market by selecting holdings. Active ETFs charge higher fees to pay for that management, and the evidence over long periods shows that most active managers struggle to consistently outperform a cheap index fund after those fees. That doesn’t mean active is always the wrong choice, but for a beginner’s core portfolio, low-cost passive index ETFs are usually the sensible default. If you want the fuller comparison with traditional pooled products, see ETFs vs managed funds.
How to Build a Simple ETF Portfolio
Many long-term investors keep it deliberately simple: one broad Australian shares ETF, one global shares ETF, and — depending on their timeframe — perhaps a bond ETF for stability. This gives worldwide diversification in two or three low-cost holdings, with no stock-picking required. A diversified multi-asset ETF can even do the whole job in a single ticker.
To spread out your entry and reduce timing risk, consider dollar-cost averaging — investing a fixed amount at regular intervals.
Common Pitfalls
- Chasing last year’s top performer. Past returns are a poor guide to future ones, and thematic funds that soared often fall hardest.
- Over-diversifying. Owning ten overlapping ETFs adds complexity without adding real diversification.
- Ignoring fees. A fund costing a fraction of a percent more per year can cost tens of thousands over a lifetime of investing.
- Buying too narrow. A single-sector or single-theme ETF is not a diversified portfolio, however exciting the story.
Buying Your ETF
Once you’ve chosen a fund, buying it works exactly like buying any share — search the ASX ticker on your broker and place an order. Our step-by-step walkthrough covers the mechanics: how to buy shares in Australia. When you eventually sell, remember that units held more than 12 months qualify for the 50% CGT discount for individuals.
This article is general information only and not financial or tax advice; consider your own circumstances and speak to a licensed adviser or the ATO before acting.
The “best” ETF is the low-cost, well-diversified one that matches your goals and that you’ll actually hold through the market’s ups and downs. Use the checklist above, keep it simple, and let time do the heavy lifting.