What Are ETFs & Index Funds?

Exchange-traded funds, or ETFs, are investment funds that are listed on a securities exchange and provide exposure to a range of shares or assets with a single purchase. ETFs can be ‘managed funds’ or ‘index funds’, or in other words, active or passive.

The Australian Finance Podcast episode below explains index funds, ETFs and managed funds in more detail:

What Does The SPDR ASX 50 ETF Invest In?

The SPDR S&P/ASX 50 Fund, as the name suggests, provides exposure to the 50 largest companies on the ASX by market capitalisation. You know the ones: Commonwealth Bank (ASX: CBA) BHP Group Ltd (ASX: BHP), CSL Limited (ASX: CSL), Westpac Banking Corp (ASX: WBC)… the usual suspects.

There are a couple of reasons why you might only wish to hold the 50 largest companies on the ASX. First of all, the 50 largest companies actually make up around 80% of the total Australian equities market, so you can get exposure to most of the market with only these companies.

Second, the largest companies also tend to be the most frequently traded, so liquidity is virtually never an issue with these companies.

Performance & Dividends

The ASX 50 SFY ETF has had similar returns to the BetaShares Australia 200 ETF (ASX: A200) and the ASX 200 Index. Over the last year, the ASX 50 Fund has returned 11.27% compared to 9.05% for A200.

Over a three-year period, the ASX 50 Fund has returned 11.66% per year compared to 11.39% per year for the ASX 200 Index.

One of the big advantages of the SFY ETF is the quarterly distributions, through which it currently offers a trailing dividend yield of 4.49%.

Fees & Risks

Management costs for this ETF are 0.286%, significantly higher than the 0.07% management fee of A200. Although the ASX 50 Fund comprises 80% of the market, the A200 ETF still offers stronger diversification benefits and gives access to some of the fast-growing companies that are just entering the index.

The ASX 50 Fund is heavily weighted towards financials, with nearly 38% of the fund invested in the sector. The next largest sector weightings are materials (16.78%) and health care (9.91%).

My Take

The ASX 50 Fund may be an option to consider but personally I would, and actually already did, choose A200 because of the superior diversification and lower fees for more or less the same return.

For our number one ETF pick, check out the free report below.

Disclosure: At the time of writing, Max owns shares in the BetaShares Australia 200 ETF (ASX: A200).