What are the 10 best ETFs in Australia in 2020?

What is an ETF?

An Exchange Traded Fund – or ETF – is a listed financial instrument that gives investors exposure to a basket of assets – in a simple and often low cost manner.

In recent years ETFs have exploded in popularity, especially amongst retail investors, due to their simplicity. Indeed, although the most popular ETFs often attempt to track the performance of some of the world’s most prominent indices – such as the iShares Core S&P ASX 200 ETF (ASX: IOZ) or the SPDR S&P 500 ETF (ASX: SPY) – investors can also take advantage of ETFs that track specific sectors, currencies, or commodities; some ETFs are even actively managed.

A key selling point of ETFs comes from the fact that they can be bought and sold on an exchange just like ordinary shares. This gives investors and traders the flexibility to enter and exit positions with relative ease. Not only that, but the majority of ETFs also have low management fees – another key reason for their rise in popularity over the last decade. In saying that, investors should realise that not all ETFs have low managment fees, particularly in the case of exotic or actively managed funds.

ETFs can also be sold short like regular shares.

Finally, one of the other significant benefits of ETFs centres on the high levels of diversification they offer investors. For example, investing in the iShares Core S&P ASX 200 ETF (ASX: IOZ) gives investors quick and easy exposure to the price movements of Australia’s top 200 companies. Obtaining this kind of diversification by other means would not only incur significant costs – but would be unnecessarily time-consuming, for individual investors in particular.

Types of ETFs

As ETFs have gained popularity in recent years, the variety of exchange traded products available to retail and institutional investors has increased exponentially.

Generally speaking, the most common types of ETFs available to investors include: broad exposure ETFs, sector ETFs, bond ETFs, commodity ETFs, currency ETFs, property ETFs, actively managed ETFs, and inverse ETFs.

Unsurprisingly, this rise in popularity of ETFs has also given rise to ‘ETF churn,’ with a number of ETFs being shuttered in recent years. In saying that, ETFs like the SPDR S&P 500 ETF (ASX: SPY) prove the staying power and investor demand for exchange traded products – with the SPY being tradable since its inception in January 1993.

The 10 Best ETFs in Australia

Now that we have examined some of the benefits as well as different types of ETFs available to Australian investors, below we look at the ‘Top 10’ ETFs currently listed on the ASX:

1. BetaShares NASDAQ 100 (NDQ)
2. SPDR S&P 500 ETF Trust (SPY)
3. iShares Global 100 (IOO)
4. iShares Core S&P/ASX 200 (IOZ)
5. iShares MSCI Emerging Markets (IEM)
6. iShares S&P/ASX 20 (ILC)
7. SPDR S&P Global Dividend Fund (WDIV)
8. BetaShares Australian Bank Senior Floating Rate Bond (QPON)
9. BetaShares Commodities Basket (QCB)
10. BetaShares Australian Equities Strong Bear Hedge Fund (BBOZ)

^{*Though the above list has ranked the 'Top 10' ASX ETFs in terms of performance – over a 1-year timeframe – investors should remember that past performance is not indicative of future performance/ results. Above figures correct prior to the market open on 1/15/2020.}

BetaShares NASDAQ 100 (NDQ)

Like the SPDR S&P 500 ETF below, the BetaShares NASDAQ 100 ETF gives Australian investors exposure to some of the world’s top technology stocks. Given the exponential rise of technology companies over the last decade, it should come as little surprise to investors that the top companies in the NASDAQ 100 ETF include: Apple, Microsoft, Amazon and Facebook.

‘With its strong focus on technology, NDQ provides diversified exposure to a high-growth sector that is under-represented in the Australian sharemarket.’

SPDR S&P 500 ETF Trust (SPY)

The SPDR S&P 500 ETF Trust gives Australian investors exposure to some of the largest and most important companies in North America. Like the NDQ above, the S&P 500 has come to be dominated by technology stocks in recent years – with the top companies in this ETF including: Apple, Microsoft, Amazon and Facebook.

Besides exposure to some of the world’s most dominant and still fast-growing companies, one of the key selling points of this ETF is that it gives investors access to 'industries that are absent or poorly represented in Australia, from Pharmaceuticals and Biotechnology to Internet and Semiconductors as well as Aerospace and Railroads.’

iShares Global 100 (IOO)

Taking diversification one step further, the iShares Global 100 ETF gives investors access to some of the world's most important large-cap companies listed across the globe. Focusing on blue-chip stocks, this ETF gives Australian investors ‘exposure to a broad range of large international companies in developed and emerging markets.’

Interestingly, when looking at the top holdings of this ETF we see a distinct pattern emerging, with Apple, Microsoft, Amazon and J.P. Morgan Chase being counted among the fund’s top holdings.

iShares Core S&P/ASX 200 (IOZ)

Unlike the other internationally-focused ETFs that we have examined, the iShares Core S&P ASX 200 ETF gives investors broad exposure to Australia’s blue-chip index – the ASX 200.

As has always been an interesting aspect of the Australian market, and though this ETF gives investors broad exposure to Australian equities – it remains heavily weighted towards financials and materials stocks. The big four banks alone make up around ~20% of this index – on a market-cap weighted basis.

iShares MSCI Emerging Markets (IEM)

The iShares MSCI Emerging Markets ETF provides Australian investors with exposure to some of Asia’s largest and most promising companies. The top individual holdings of this ETF include: Alibaba Group, Tencent, Taiwan Semiconductor Manufacturing, and Samsung Electronics.

iShares S&P/ASX 20 (ILC)

Though even more concentrated than the iShares Core S&P/ASX 200 ETF discussed above, the iShares S&P/ASX 20 ETF may potentially appeal to more income-focused investors. According to the ASX, this ASX 20 ETF currently boasts an impressive dividend yield of 5.16% – with dividends paid quarterly.

As iShares also points out, this ETF gives investors, ‘low cost exposure to the 20 largest Australian stocks,’ with a management fee of just 0.24%.

SPDR S&P Global Dividend Fund (WDIV)

Impressively, the SPDR S&P Global Dividend Fund ETF most recently reported a dividend yield of 4.70%. Dividend payments from this ETF are distributed semi-annually.

The fund’s mandate of ‘investing in companies with increased dividends or those who have maintained stable dividends for at least 10 consecutive years,’ may also rank as a key positive for investors looking for a history of consistency.

BetaShares Australian Bank Senior Floating Rate Bond (QPON)

Looking at more defensive ETF options, the BetaShares Australian Bank Senior Floating Rate Bond ETF gives Australian investors ‘exposure to a portfolio of some of the largest and most liquid senior floating rate bonds issued by Australian banks.’

Key benefits of this Bond ETF include: historical stability, a monthly stream of income payments, and its low correlation with equities markets. The running yield on this ETF, as reported by BetaShares, currently stands at 1.80% per annum.

BetaShares Commodities Basket ETF (QCB)

The BetaShares Commodities Basket ETF gives Australian investors diverse exposure to the performance of a number of different commodities. As BetaShares points out: by purchasing this ETF, ‘investors avoid [the] complications and costs of directly buying futures or physical commodities.’

By sector, this ETF has the following weightings: 30.5% in agriculture, 27.2% in energy, 19.8% in industrial metals, 14.0% in livestock and 9.4% in precious metals – as of November 30, 2019.

BetaShares Australian Equities Strong Bear Hedge Fund (BBOZ)

Maybe one of the most interesting choices on our ‘Top 10’ ETF list, the BetaShares Australian Equities Strong Bear Hedge Fund allows investors to potentially benefit/ profit from a decline in value of the ASX 200 benchmark. Ultimately, this means that this ETF may be used as both a hedging tool (to protect one’s portfolio against market declines, for example) or a vehicle for speculation on the downward price movement of the ASX 200 index.

Looking at the mechanics of this ETF, BetaShares points out that:

‘A 1% fall in the Australian share market on a given day can generally be expected to deliver a 2.0% to 2.75% increase in the value of the Fund (and vice versa).'

How to trade Australian ETFs

To trade any of the ‘Top 10’ ASX ETFs that we have discussed above – traders and speculators can use derivatives trading, e.g. Contracts For Difference (CFDs) through IG’s world-class trading platform.

Trading Australian ETFs

To ‘buy’ or ‘sell’ Australian ETFs (and go long or short), follow these easy steps:

1. Create an IG Bank trading account or log in to your existing account
2. Enter the name of any of the 'Top 10' ETFs in the search bar and select it
3. Choose your position size
4. Click on ‘buy’ if you want to go long or ‘sell’ if you want to go short, in the deal ticket
5. Confirm the trade

The Best Australian ETFs Summed Up

Ultimately, ETFs provide individual Australian investors with a number of benefits that would otherwise be difficult to achieve. Specifically, ETFs:

• Help indiviudal investors diversify their portfolios and easily gain exposure to international markets, different asset classes and sectors
• Can be bought and sold just like shares
• Often have low management fees
• Can be sold short

As with any investment however, investors should remember that investing in ETFs is not without risk. Maybe the most relevant risk to investing or trading in the ETFs that we have discussed today is ‘Market Risk’. As PWC Australia defines it, market risk is the risk of an ‘instrument or investment increasing or decreasing as a result of volatility and unpredicted movement in market valuations.’

Though measures can be taken to mitigate ‘Market Risk’ – for example, taking advantage of the BetaShares Australian Equities Strong Bear Hedge Fund ETF – should you think the ASX 200 is set to decline in value, market risk can never be removed completely.

Ultimately, such a point reiterates the ever-present need for investors and traders to hold a portfolio of diversified assets and always ensure that suitable risk mitigation strategies are being used. As is always the case, investors should never invest more than they are willing or able to lose.

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