Exchange traded funds (ETFs)

Last updated: 1 September 2026

Exchange traded funds (ETFs) are managed funds that trade on a stock exchange. They can give you access to many different investments in one trade. 

How ETFs work

When you invest in an ETF, you buy units in a managed fund. The fund pools your money with other investors and the ETF’s manager invests the money. 

ETFs can invest in a wide range of assets including shares, bonds, property, commodities, currencies and crypto-assets. You don’t own the underlying investments directly. Instead, you own a stake in the ETF. The value of the ETF can go up or down. Returns come from changes in the value of the underlying assets and any income they generate. 

You can lose money if the value of the underlying assets falls. Fees and trading costs also affect your return. 

ETF providers can create and redeem units to match investor demand. This helps keep the price of the units close to the value of the fund’s assets, called net asset value or NAV. 

Types of ETFs

There are hundreds of ETFs in Australia. They differ in what they invest in and how they are managed. 

What ETFs invest in 

Assets can include: 

• Australian or international shares 
• a share market sector like technology, mining or financials 
• property or infrastructure 
• cash, bonds and credit
• precious metals and commodities 
• foreign currencies or crypto assets 

ETFs may diversify across multiple asset classes.  

How ETFs invest 

Passive ETFs - In Australia, most ETFs are passive investments that aim to track the value of an index or asset (for example, the S&P/ASX200) rather than have a fund manager choose investments.

The value of the ETF goes up or down with the index or asset they're tracking.  

Active ETFs - Active ETFs have a fund manager that chooses investments that aim to deliver the ETF’s stated goal. The manager may aim to outperform an index, provide income or grow the fund’s value over time.  

An ETF’s goal and strategy are explained in its product disclosure statement (PDS). 

Physical vs synthetic ETFs - Some ETFs own all or some of the assets in the index they track. These are called physically-backed ETFs.

Others use derivatives to copy the movements of an index or asset. These are called synthetic ETFs. Synthetic ETFs have an additional risk that the counterparty to the derivative could fail. 

Complex ETFs - Some ETFs are labelled ‘complex’. They can be active or passive. The ‘complex’ label means they are using more complex investment strategies than simply owning stocks, bonds or other assets.  

Strategies might include borrowing, short selling or the use of derivatives.

Benefits and risks of investing in ETFs

Possible benefits of ETFs

• Diversification – ETFs allow you to buy a basket of shares or assets in a single trade. This can help to diversify within an asset class. ETFs also allow you to invest in markets or assets it can be difficult or expensive to access. 
• Transparency – ETFs publish the net asset value (NAV) each trading day. This can help you track how the underlying asset are performing and whether the price of the ETF is close to the NAV. Many ETFs also publish information about their holdings.
• Low cost – many ETFs have low management fees. They may be usually cheaper than equivalent managed funds that are not quoted on an exchange.
• Easy to trade – you can buy and sell ETFs during the trading hours of the exchange, through a broker. You can typically buy smaller quantities of ETF units than unlisted managed funds.

Possible risks of ETFs

Like all investments, ETFs carry risk. Risks can depend on how the ETF is managed and what it is invested in. Not every ETF has every risk listed below. 

Risks can include: 

• Market risk – the assets in the fund can fall in value because of events affecting the entire market 
• Sector risk – an ETF focused on an asset, sector, country or theme can be affected by events affecting that area 
• Currency risk – overseas investments can be affected by changes in exchange rates 
• Liquidity risk – an ETF can become harder or more costly to trade if the assets it invests in are not liquid 
• Inflation risk – your returns may not keep up with rising prices, so your money buys less over time 
• Interest rate risk – changes in interest rates can affect the value of the fund’s investments, especially bonds and other loans 
• Credit risk – a borrower the fund has lent to may not repay the loan 
• Complex strategy risk – if the fund borrows to invest, both gains and losses are magnified. Tactics like using derivatives and short selling can also add risk. 
• Manager risk – the investment manager may make poor decisions or fail to meet their investing goals. 

Deciding if ETFs are right for you 

There are a lot of different ways you can invest your money – ETFs are just one way of investing. 

ETFs might suit you if: 

chevron_right you want a relatively simple way to invest 

chevron_right you want your money spread across a range of investments 

chevron_right you do not want to choose and manage each investment yourself 

chevron_right you’re comfortable that the value can rise and fall 

ETFs may not suit you if: 

chevron_right you want full control over every investment choice 

chevron_right you need your money back at short notice 

chevron_right you do not want to pay ongoing management fees 

chevron_right you’re not comfortable with the risk of losses 

 

ETFs are not an appropriate investment for everyone. It’s important to consider your investing timeframe and risk tolerance. Learn more about developing an investment plan, and how to seek financial advice.