How ETFs work

Think of an ETF like a shopping trolley.

Instead of buying 100 different shares one by one, you can buy units in a fund that holds a mix of investments. Picture the fund as a trolley and its investments as the groceries inside.

The trolley: The trolley is the ETF itself. You buy units in the fund rather than buying every investment separately.

The groceries: The groceries are what the fund owns: maybe shares, bonds or other assets. Different ETFs hold different things.

Main point: The ETF is the fund; the investments inside it are what you’re exposed to. Check the contents, not just the name.

Not every trolley has the same groceries.

One ETF might own shares in hundreds of companies worldwide. Another might focus on just a handful of tech businesses. They’re very different investments.

“ETF” tells you the wrapper, not the risk.: Some ETFs follow an index, meaning a list of investments picked using set rules. Others have managers making decisions. Check what the fund actually holds, what it’s trying to do and where the risks are.

What if you spread A$1,000 across more holdings?

Move the number of pretend holdings to see an equal split of A$1,000. Actual ETFs often give bigger weights to some holdings.

Holding more companies doesn’t always mean better diversification. You might still own lots of businesses exposed to the same risks.

Check what’s in the ETF before buying.

The name on the front only tells you so much. Like checking a food label, it pays to look at the details.

What it holds: Look at the companies, industries and countries the fund invests in.

What it costs: Check ongoing management costs, any brokerage and the difference between quoted buy and sell prices.

What the documents say: Use the issuer’s current fact sheet and official documents, including a Product Disclosure Statement (PDS) if one applies.

Main point: Look at what the fund owns, what it costs and what could go wrong. The name alone isn’t enough.

An ETF can be easy to buy without being low risk.

A few taps in an app might buy you a fund, but you still need to understand what that fund owns.

Check what’s in the trolley: The investments inside the fund are what you’re taking exposure to.

Read the fine print: Check its fees, risks and how easily you can buy or sell it.

Main point: Easy to buy doesn’t mean safe. Understand what’s inside the ETF before making a decision.