How to invest in index funds

What are index funds?

Index funds are types of investment funds that passively track the performance of a specific benchmark index with the goal of mirroring its returns. For example, if you invest in an exchange traded fund (ETF) that tracks the ASX 200, known on our platform as the Australia 200, you have exposure to the performance of all the companies that make up the index.

In Australia, investment funds can be categorised based on how they are traded (on-exchange or off-exchange) and how they are managed (actively or passively).

On-exchange funds are listed on a regulated stock exchange. This offers more price transparency since you can see the current market price at any time. You can buy or sell quickly during market hours, as trades happen almost instantly in liquid markets.

Off-exchange funds are bought and sold directly with the fund manager rather than on an exchange. These funds process transactions typically at the end of each trading day at the net asset value (NAV), not in real-time like ETFs.

The main categories include:

• On-exchange, passive funds eg ETFs
• On-exchange, active funds eg real estate investment trusts (REITs)
• Off-exchange, passive funds eg traditional index funds
• Off-exchange, active funds eg managed funds (unit trusts)

For passive funds, which specifically track an index, you can generally choose between:

• ETFs that trade on the exchange
• Traditional index funds that you buy directly from the fund manager

Both types track the same market indices, but differ in how you trade them and their fee structures.

How to invest in index funds

You can invest in index funds via a wide range of index funds if you have a share trading account with us. Here are the detailed steps on how to buy index funds in Australia:

1. Learn more about index funds and why you would buy them
2. Identify the index you want to track
3. Pick the fund you want to buy based on your chosen index
4. Open a share trading account
5. Buy shares in the index fund and open your position

1. Learn more about index funds and why you would buy them

Index funds are one of the most popular ways to get access to a diversified set of assets in one position. Diversification is known for being lower risk, as all your ‘eggs’ aren’t in one ‘basket’. You can diversify across more than just asset classes – you can also invest across an array of geographies, industries and company sizes.

Not only do index funds offer broad exposure, but they’re also considered a lower-cost alternative to investing in several stocks, bonds, etc individually. Note that all investment carries risk, and past performance doesn’t guarantee future results.

2. Identify the index you want to track

Once you’ve decided that you’d like to invest in index funds, it’s time to identify the type of index you’re interested in. We’ve listed some examples of funds and what they track below:

• Stock or equity index funds – stock indices like the ASX
• Bond index funds – bond indices like the US Treasury Index
• Balanced index funds – both stock and bond indices
• Market cap index funds – market-capitalisation weighted indices like the S&P 500
• Equal weight index funds – indices where all assets carry the same weight
• International index funds – multiple indices across the world, like the Nasdaq, Hang Seng, FTSE, and emerging markets
• Sector-based index funds – indices that cover the same industry, eg tech stocks

You don’t have to invest in a single type of index fund; this is an opportunity to diversify even further. You can decide, for example, to allocate 50% of your investment to bond index funds and 50% to international index funds.

3. Pick the fund you want to buy based on your chosen index

It doesn’t matter which type of index fund you prefer; we have thousands of markets to choose from, including ETFs, REITs, ETCs and investment trusts.

Exchange traded funds (ETFs)

ETFs track the performance of an underlying asset or group of assets. We have an ETF screener, where you can choose the ETF that’s right for you. Use our screener to filter more than 2000 global ETFs by asset class, country, performance, and more.

You can decide between some of the world’s biggest providers, including:

• iShares – the leading ETF provider, with more than $2 trillion in assets under management
• Vanguard – offers a variety of ETFs covering US and international stock and bond markets, as well as industry-specific sectors
• Invesco – with a comprehensive range of specialist ETFs covering commodities, forex, fixed income, and equities

Real estate investment trusts (REITs)

REITs work in the same way as mutual funds, with several private investors contributing their own capital to create one single pool of funds. These funds are used to build a portfolio of properties, and the income is almost wholly distributed among its shareholders on a regular basis. We offer dozens of REITs to choose from, with providers like Nexus and Cromwell.

Exchange traded commodities (ETCs)

ETCs are bought and sold on-exchange; they give you exposure to a basket of commodities in a single position. Commodities are material assets like oil, gas, livestock and wheat. Because ETCs track the underlying price of the commodity, its price will be affected by anything that moves the price of the commodity itself.

Investment trusts

An investment trust is a pool of investor funds used to buy financial assets. If you invest in such a fund, your capital is your own, but you don’t make the investment decisions yourself – the fund manager does. Our trusts give you access to a wide range of markets and are managed by some of the world’s best fund managers, such as BlackRock and Aberdeen.

4. Open a share trading account

Investing in index funds in Australia requires a share trading account. You can apply to open a share trading account with us, which enables you to invest online.

Open an investment account

5. Buy shares in the index fund and open your position

When you have opened a share trading account and you’ve decided on the fund you want to invest in, follow these steps:

1. Log into your account
2. Search for the fund you’re looking for eg Lyxor Australia S&P ASX 200 UCITS ETF
3. Set your position size
4. Click on ‘buy’ in the deal ticket

Examples of index funds

We have thousands of ETFs to choose from, including a big selection of REITs, ETCs and investment trusts. Some examples include:

• iShares Core S&P 500 UCITS ETF
• Vanguard FTSE 100 UCITS ETF
• Vanguard S&P 500 ETF (All Sessions)
• Invesco QQQ Trust
• Vanguard Index Funds - Vanguard Value ETF
• iShares Core MSCI EAFE ETF
• SPDR Dow Jones REIT ETF
• Starhill Global REIT
• WisdomTree Brent Crude Oil ETC
• Invesco Physical Gold ETC
• WisdomTree Wheat ETC
• BlackRock Income & Growth Investment Trust
• Aberdeen New Thai Investment Trust PLC

Advantages and disadvantages of index funds