What are the 10 best ETFs in Australia?

Australian ETFs: what you need to know

An Exchange Traded Fund, more commonly referred to as an ETF, is a pooled investment security that works much like a mutual fund.

ETFs typically track multiple shares across a specific sector, investing theme, index, commodity, currency, or other assets. Their core advantage over mutual funds is their liquidity; they can be bought and sold on stock exchanges in the same way as individual shares.

The first-ever ETF was the SDPR S&P 500 ETF (SPY), which has tracked the US benchmark S&P 500 since 1993. Its inventor, Nate Most, described his ‘thinking outside the box’ strategy as a strategy to boost US trading during its then financial paralysis.

This first ETF was so well-liked that SPY is still by far the most traded ETF globally. But this fund structure has now exploded in popularity, with thousands available to buy aimed at every kind of investor.

Top 10 best Australian ETFs to watch in 2022

1) iShares Core S&P ASX 200 ETF (ASX: IOZ)

Most investors will have heard of IOZ, if only peripherally. The ETF offers low-cost exposure to the 200 largest companies listed on ASX in a single fund and often constitutes the nucleus of domestically focussed Australian portfolios. However, it’s also weighted heavily towards mining and financials, both of which are highly cyclical.

Its objective is solely to follow the performance of these 200 securities. And given the volatility of the ASX 200 over the years, this ETF is unlikely to be appropriate for investors with short time frames.

2) Vanguard MSCI Australian Small Companies ETF (ASX: VSO)

VSO offers exposure to a more diversified portfolio of small-cap companies, as it tracks the MSCI Australian Shares Small Cap Index. The ETF invests predominantly in industrials, materials, and the consumer discretionary sectors, offering the potentially higher long term capital growth typical of small caps, at the expense of the safety offered by the blue-chip ASX 200.

Overall, the risk-reward ratio is greater, and higher volatility is the par for the course.

3) Betashares Crypto Innovators ETF (ASX: CRYP)

Instead of investing directly into cryptocurrencies such as Bitcoin or Ethereum, CRYP adopts a ‘picks and shovels’ approach, so-called for the sellers of mining equipment during the California Gold Rush. Accordingly, CRYP tracks the performance of global companies at the forefront of the crypto economy, such as Coinbase, Riot Blockchain and Microstrategy.

This ETF can be attractive to investors who want exposure to cryptocurrency within the familiar ETF structure. However, given the extremely unpredictable nature of crypto, Betashares cautions that CRYP is only suitable for investors ‘who have a very high tolerance for risk and the capacity to absorb a rapid loss

4) Vaneck Vectors Video Gaming & eSports ETF(ASX: ESPO)

ESPO provides exposure to the booming video gaming industry, which crosses the traditional divides between entertainment, video gaming, sports, and media. The sector has high potential growth due to the widespread youth adoption and continued technological advancement. There are now 2.7 billion gamers worldwide, and video gaming revenue in the US overtook sports and films for the first time last year.

With holdings including EA, Nintendo, Nvidia, Roblox, and Activision Blizzard, ESPO also provides exposure to the nascent Metaverse. Of course, ESPO is highly concentrated on one specialist sector.

5) BetaShares Global Cybersecurity ETF (ASX: HACK)

HACK tracks globally leading companies involved in the cybersecurity sector. Cybersecurity is becoming an investment theme for 2022, as the Russia-Ukraine war continues to both countries’ critical and military infrastructures under attack. And with worldwide cybercrime rising, demand is only expected to grow.

Moreover, the sector is heavily underrepresented on the ASX, so HACK is popular with investors who also invest predominantly in domestic stocks. The fund includes giants such as Crowdstrike and Zscaler, as well as emerging players from around the world.

6) BetaShares S&P ASX 200 Resources Sector ETF (ASX: QRE)

QRE tracks the largest ASX-listed companies in the resources sector including mining giants BHP and Rio Tinto, and oil and gas titan Woodside Petroleum. The sector is well-positioned to benefit from growth in India and China but likewise is exposed to weakened demand from these countries in times of economic distress.

Further, while most commodities are currently at multi-year highs, QRE is at the mercy of their cyclical nature. Of course, the continued effects of the Ukraine war and the covid-19 pandemic leave the sector in unknown territory.

7) BetaShares Global Energy Companies ETF (ASX: FUEL)

FUEL provides exposure to the biggest global energy companies, hedged into Australian dollars. As such, its portfolio includes the likes of Chevron, ExxonMobil, Shell, and BP. And this gives investors exposure to energy companies that are larger, more geographically diversified, and more vertically integrated than those on the ASX.

Of course, while oil and gas are at multi-year highs, Brent Crude went negative only two years ago. Amid the long-term transition to renewables, fossil fuel volatility is all but guaranteed.

8) VanEck Vectors MSCI International Sustainable Equity ETF (ASX: ESGI)

The polar opposite of QRE and FUEL, ESGI provides a diversified portfolio of sustainable international companies around the world. The fund excludes companies if they own fossil fuel reserves, or derive revenue from mining thermal coal, oil, or gas. In addition, it rejects high carbon emitters, as well as companies that ‘are not socially responsible investments.’

This fund is targeted at ethical investors who may not have the time or resources to ensure an individual company meets their criteria.

9) Betashares Asia Technology Tigers ETF (ASX: ASIA)

ASIA tracks the 50 largest technology and online retail stocks in Asia (excluding Japan), including giants Alibaba, Tencent, Baidu, and JD.com.

Due to its younger population, Asia is surpassing the West in tech adoption, with the region likely to remain a growth area. And with tech underrepresented on the ASX, this ETF complements investors with a predominantly domestic focus.

A key risk for ASIA is the current regulatory stand-off between Chinese and US regulators, with the US demanding increased access to Chinese stock financials in order for them to remain listed across the Pacific.

10) VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT)

The investing term ‘economic moat’ was popularised by Warren Buffett and refers to the defensive moat that surrounds some medieval castles. MOST offers exposure to a diversified portfolio of top US companies with sustainable competitive advantages, akin to ‘wide economic moats’ that prevent competitors from stealing market share.

These are also companies with attractive prices compared to Morningstar’s estimate of fair value. Of course, this investment style is only for investors with very long term timeframes.

How to trade or invest in Australian ETFs

1. Learn more about ETFs
2. Find out how to trade or invest in ETFs
3. Open an account
4. Place your trade

You can open a position on ETFs either through share trading or derivatives trading. Share trading means that you take direct ownership of the stock. By comparison, derivatives trading – such as CFD trading – allows you to speculate on the price movement of a company’s shares without actually taking ownership of them.

For a complete breakdown of the benefits and drawbacks of each strategy, please click here.

Australian ETFs: further important information

ETFs have exploded in popularity across the world because they appeal to all classes of investors.

Adventurous traders can take advantage of ETFs that track specific sectors or investing themes while diversifying their risk into multiple companies in just one trade. Traders can also benefit from research that no one investor can conduct if they choose an ETF that is actively managed.

Meanwhile, cautious investors can buy ETF index trackers, such as the Australian iShares Core S&P ASX 200 ETF, to benefit from the long-term capital rise. Such a high level of diversification can give risk-averse investors the confidence to profit from the stock market over a long period of time.

And on the above list alone, there are ETFs that focus on sectors as varied as ESG investing, cyber defence, and resources. With over 8,000 available globally, there’s enough variety to appeal to almost any investor. This is especially useful for Australians, as ETF investing is a simple way to gain exposure to sectors underrepresented on the ASX.

And ETFs also offer a way for retail investors to keep up with the latest investing trends. For example, the Roundhill Ball Metaverse ETF provides exposure to the Metaverse, an investment trend that is arguably not yet mainstream.

ETFs are also extremely practical; for example, to invest in all 200 of Australia’s top companies individually and buy up and sell shares as they enter and exit the index, is far more time-intensive than simply buying into an ETF tracker.

And these funds also usually come with cheap management fees, with sub 1% charges not uncommon. Of course, actively managed ETFs can cost far more, especially if managers operate in emerging trends or research-intensive sectors.

In summary, ETFs are attractive, highly liquid investing options, that provide exposure to many companies in just one trade. Of course, each ETF is only as good as its underlying investments.