What's driving Australia's ETF investing boom?

Think back to 2001. John Howard was PM, Harry Potter was slaying it at the box office, and in a quiet corner of the Australian Securities Exchange (ASX), the first exchange-traded funds (ETFs) were listed.

It's doubtful that anyone back then could have foreseen the impact ETFs would have. Fast forward to 2025, and ETFs have well and truly come of age.  

Today, Australians have $300 billion invested in ETFs - a figure that's grown by $80 billion in the past year alone and has more than quadrupled over the past five years.  

But the ETF story is about so much more than scale.  

Opening the door for millions to invest 

The major asset classes we see today - particularly shares and bonds - have been around, in one form or another, for centuries.  

Until relatively recently, though, they were typically the mainstay of the wealthy. In the early 1990s, for example, just 7% of Australians owned shares.

These days, Investment Trends estimates that about 2.7 million of us invest in ETFs and close to 700,000 ETF investors are women. The past 12 months have seen 411,000 new investors come on board. 

So, what's driving the popularity of ETFs, and is it likely to continue? 

ETFs tick plenty of boxes  

ETFs have always held the promise of affordable access to a range of asset classes. Over time, ETFs have more than lived up to this promise.  

Instant diversity is still a chief point of appeal, but it's not the only factor seeing Australians flock to ETFs. Here are a few others.

Diversification on cruise control 

Buy a share, and you place your hopes on the fortunes of a single company. Buy an ETF, and you gain access to a whole basket of companies. This lets investors spread their risk. 

Local shares aren't the only investment up for grabs. If you want a stake in corporate giants like Apple, Meta (owner of Facebook), Nvidia, Amazon or Alphabet (owner of Google), ETFs offer an easy entry point.  

Today, there's considerably more to choose from than shares.  

The number of ETFs has almost doubled over the past five years. Among the 400 ETFs currently listed on the ASX, investors can pick from funds that focus on cash, commodities or cryptocurrency, as well as bonds and alternative assets, plus ETFs that take a themed approach.  

The upshot is that portfolio diversification, which previously took years to achieve, can now be realised in a matter of months.  

The affordability of low fees 

Before the arrival of ETFs, investors could gain diversification through unlisted managed funds. However, they typically came packed with fees which could include entry fees, admin fees, investment management fees, switching fees, exit fees and performance fees. 

The sheer weight of fees meant the money-making dice was often stacked in favour of the fund manager. 

After two decades of ETFs, investors no longer wear this sort of fee grab. Why would they, when ETFs provide access to, say, a basket of Aussie shares for a fee as low as 0.03%? 

That said, it still pays to keep an eye on fees.  

As the table below shows, you could pay 0.03% to as much as 2.56% depending on the ETF and the underlying investment. In general, actively managed ETFs are more likely to charge higher fees than passively managed, 'index' ETFs.  

ETF fees by asset class 

Source: InvestSMART

Transparency - knowing where your money goes 

ETFs are great at providing clear information about fees, the fund's investment style - passive or active - past returns and what it invests in.   

ETFs are required to publish a full report of the fund's investments on a daily basis. So, head to the webpage of any ETF and you'll find up-to-the-minute details of the underlying holdings.  

This is helpful in letting investors mix and match ETFs. It's also useful if you already own directly held shares, and don't want to overlap with any stocks included in an ETF's portfolio.  

Where to from here for ETFs? 

Demand for ETFs shows no signs of slowing. According to an Investment Trends survey, nearly 2.2 million current ETF investors intend to make another investment in the next year. And an additional 300,000 people plan to start investing in ETFs in the next 12 months. If this happens, 3 million Australians could be ETF investors by 2026. 

The biggest rise in participation is among people aged 45-64 and 35-44, which may reflect plans to grow wealth outside of super on the road to retirement. 

ETFs can also play a role in the next generation of portfolios because they provide a convenient and cost-effective opportunity to build wealth at a time when soaring house prices are making property ownership a challenge.  

Despite strong growth, ETFs still only account for about 5% to 6% of Australia's managed funds industry. That's low by global standards. In the US, ETFs make up 10% of the market. Chances are, as more investors pile into ETFs, we'll see even more funds list on the ASX. 

Are there downsides to ETFs?  

While I'm a big fan of ETFs, it's worth being clear that they are not risk-free.  

Your investment can rise and fall in line with the value of the underlying assets. If you're investing in global ETFs, you could be hit by currency swings. 

It also pays to be mindful of the ideal holding period for the ETFs you select. Those that invest in shares and other growth assets call for a medium to long-term commitment to generate solid returns. 

The bottom line is that it pays to research the market before investing in ETFs. In return, you get a simple, affordable and low-cost way to build a diversified portfolio.

Want to compare ETFs? Check out our handy online ETF filter tool. It can help you narrow down your options based on filters such as investment category or InvestSMART's star rating.

InvestSMART also has a range of diversified portfolios that all come with a capped management fee. If you'd like help selecting the right style of portfolio for you check out our free statement of advice quiz. It will show you which InvestSMART ETF portfolio may best suit your goals and investment timeframe.