How To Buy And Invest In ETFs In Australia

Because you can’t just go to the store to purchase a basket of ETFs, the first thing you need to do is open a brokerage account, which is an account you can use to purchase and hold investments. This isn’t just limited to ETFs, either. Brokerage accounts can be used to purchase other assets that are listed on exchanges, such as stocks.

There are different ways to open a brokerage account, such as through a firm or an online broking service.

When you open a full-service brokerage account with a brokerage firm, the firm buys and sells assets—in this case, your ETFs—on your behalf. 

When you use an online broking service, you are then purchasing an account through a brokerage firm while still making your own investment decisions. In Australia, this is most commonly referred to as a share trading account.

Related: How to Save Money in 2023

Because major brokerages offer most of the main investment account types, you need to consider a few other traits when deciding where to open a brokerage account, including:

• Fees. Look at how they charge for trading or for maintenance. Many brokers no longer charge a maintenance, administration or stock trading fees—which is important because ETFs trade like stocks.
• Minimum deposit. In some cases, you might have to provide a minimum deposit to open an account, though with ETFs, that minimum is generally only the cost of one share. If you’re just starting out, look for brokerages that offer affordable minimums or no minimum.
• Types of assets. Not all brokers allow you to purchase every type of investment and if they do, they might not allow for fee-free trading. If you’re hoping to use ETFs in your portfolio, but also want to be able to buy other assets, double check that you’ll be able to buy them at your broker of choice.
• Customer service. Find out what type of help is offered and how responsive the brokerage is. Does it have good reviews, and has it been widely received by the Australian investing community?
• Special features. What other features does the brokerage offer, such as financial advice and planning? Make sure the brokerage you choose has the less traditional features that will help you reach your financial goals.

What is a Robo-Advisor?

If you want to avoid the stress of picking individual ETFs or keeping up with routine maintenance, you might consider a robo-advisor. Most robo-advisors construct diversified portfolios of ETFs and provide automated portfolio rebalancing to keep your investments on track to meet your goals.

However, you’ll pay a management fee, as well as investment fees. Some also charge administration fees. These can often add up, especially if you are investing with smaller balances.. With many brokers today, you can manage your portfolio on your own for much less. But for some investors, the convenience of a robo-advisor is worth the cost.

Once you have a brokerage account, it’s time to decide how you want to invest in it. First, you’ll need to determine your asset allocation, or what percentage of each type of investment security you’ll want to reach your goals. You’ll generally want to split your investing dollars between conservative assets and aggressive assets. An example of a conservative asset is a Bond ETF. Bond ETFs offer more modest returns but provide stability in value. Stock ETFs, on the other hand, have greater growth potential but may experience larger fluctuations in value in the short term.

Those value changes are the main reason why financial advisors recommend you use your timeline as a guide for your asset allocation. The further away your goal, the more time you have to recover from any short-term stock ETF dips. The closer it is, the more you’ll probably want to lock in its value with bond ETFs unlikely to experience fluctuations.

Of course, you’ll also want to consider how willing you are to take on the potential you may lose money for greater gains, a financial concept called risk. If you’re unwilling to take on much risk, even for a longer-term goal, you might invest more conservatively. This simply means you’ll have to contribute more of your own money to reach your goals, instead of relying on investment gains.

Here’s how that might play out for saving for retirement, according to US-based investment management firm T. Rowe Price:

• 20s & 30s: 90% to 100% stocks, zero to 10% bonds
• 40s: 80% to 100% stocks, 0 to 20% bonds
• 50s: 65% to 85% stocks, 15% to 35% bonds
• 60s: 45% to 65% stocks, 30% to 50% bonds, 0 to 10% cash/cash-equivalents
• 70+: 30% to 50% stocks, 40% to 60% bonds, 0 to 20% cash/cash-equivalents

Once you’ve decided on an ETF asset allocation, you’ll need to research the ETFs most likely to help you reach your goals. Your brokerage should offer ETF research tools, like a database you can screen for particular indexes or strategies, and you can also use third-party databases, like ETFdb.com, which can be adjusted to search country-by-country, including by Australian ETFs.

You’ll want to keep a couple of things in mind as you look for ETFs:

Index

Almost all ETFs seek to copy the performance of indexes. You’ll want to choose indices that reflect the asset allocation you’re aiming for. Stock-based indices, like the ASX 200 and S&P500 are popular starting points for the stock component of your portfolio.

If you want to pursue specific sectors, you might consider indexes that track segments of the market, like large-cap, mid-cap or small-cap companies or international/emerging markets stocks. These may carry more risk than a broad index like the ASX 200 but they may also offer higher returns.

For the bond-based part of your portfolio, you may consider corporate bonds or government bonds. Government bonds are also known as Treasury Bonds, which issued on sovereign debt by the Australian government and guarantee a rate of return if held to maturity.

Fees

Fees can vary across providers, and you’ll want to choose the ETFs with a competitive price point. Fees can have a large impact on your final return so ensure that it is a factor when choosing an ETF to invest in. 

Some brokers now offer fee-free trading for ETFs. This can be a good option for investors that invest small balances more frequently. However, often these low and no-cost brokers have little to no extra features or services. Ensure they are fulfilling all of your needs.

If you’re managing your portfolio on your own, and not using a robo-advisor, you’ll need to select and buy the ETFs. In general, the process is like buying a stock.

• Fund your account. You’ll need to transfer cash into your brokerage account to buy your ETF shares.
• Search for the ETF ticker symbol: If you’re using one of your brokerage’s research tools, you may be able to purchase shares directly from the ETF’s entry. If not, you’ll need to go to the trade section of the brokerage and enter the ticker symbol.
• Enter the number of shares you want to buy: Next, indicate the number of units you want to buy. Many brokers will show you the maximum number of units you can buy with the money you have in your account. This is helpful because you generally can’t buy fractional units of ETFs. Because of this, keep in mind that you may not be able to invest all of the money you have ready to invest at a given time. Some may have to wait until you have enough for another full unit.
• Confirm the order: Finally, you’ll be asked to confirm the order. You have two main choices: a market order or a limit order. Market orders mean that your purchase request goes through at the current price of the ETF. Limit orders means that you set a unit price that you are willing to transact at. Morningstar manager research analysts prefer limit orders, as market orders can add risk to your trade. For example, if you are purchasing an ETF without much volume, you may trade at a significantly higher price than expected. Setting a realistic limit order reduces this risk.

Most of the time, buying ETFs isn’t a one-and-done thing. You’ll want to buy regularly to help you reach your investing goals. Luckily, most brokerages allow you to set up a purchase plan.

Arrange for a set amount of money to be moved from your bank account into your investment account on a regular basis. Then, you’ll provide instructions for the brokerage to buy as many shares or units as possible with the money in your account.

This strategy of regularly investing a set amount of money is known as dollar-cost averaging, and using it consistently may help you to reduce risk in your portfolio over time. This is by spreading out your investments across multiple prices, instead of risking purchasing a large sum of shares at an inopportune time. However, the trade off to this is that you aren’t invested in the market for a longer time period, and instead invest smaller amounts over time. Ultimately, many of us who invest from our paychecks do not have the choice to invest in a lump sum so dollar-cost averaging is our only choice.

While you’re setting up your plan to buy ETFs, you’ll also want to think about how often you’ll check up on your portfolio. Most experts recommend you look in every six to 12 months to make sure your asset allocation hasn’t shifted too much from asset classes performing particularly well or poorly.

If your holdings have shifted significantly from your desired breakdown, you may want to buy and sell certain investments to bring yourself back to your desired level of risk. It is important to remember that selling does incur transaction costs and taxes in most instances. As such, if you have a long-time horizon, you may want to do this on a less frequent basis. You can also elect to set a range that you’re comfortable with instead of a set percentage. This will help with reducing unnecessary costs and taxes. For example, you may have a range of 70% to 80% in stocks, instead of 70%. This isn’t necessarily a complicated or time-consuming process, but if you’d prefer to set it and forget it with your investment portfolio, a robo-advisor can do this for you automatically.

It is likely that you may want to sell your investments at some point to fund financial goals. It is a good idea to plan ahead and understand when and how you’ll sell your investments. Look for ways to minimise capital gains taxes, such as through tax-loss harvesting, and consider strategies to salary sacrifice into superannuation accounts to minimise tax bills. A financial advisor can help you figure out how to do these in the most efficient way.