From liquidity to diversification, ETFs provide a valuable opportunity for both newcomers and seasoned investors. Discover five reasons why ETFs are becoming increasingly popular among Australian investors.

Exchange Traded Funds (ETFs) are pooled investment securities that trade on exchanges like the ASX (Australian Securities Exchange) and are becoming increasingly popular among investors in Australia and around the world. These funds offer flexibility, cost-effectiveness and broad market exposure, making them an attractive option for investors of all levels of experience.
For both newcomers and seasoned investors looking to diversify their portfolios and explore different asset classes, ETFs provide a valuable opportunity.

Here are five reasons why investors are increasingly drawn to ETFs:

1. ETFs are liquid

Liquidity is one of the most important features investors are seeking in a fund. Investors are attracted to ETFs because they generally have high liquidity, meaning they are usually easier to buy and sell compared with some other funds and asset classes.

An indicator as to whether an ETF is highly liquid is its bid-ask spread, or the difference between what price buyers are prepared to pay and what price sellers are prepared to accept. Generally a lower spread indicates higher liquidity (i.e. greater demand to buy and sell).

As a unit holder in an ETF, it is important to note that the fund manager owns the underlying shares. On rare occasions an ETF can have liquidity issues when the manager cannot sell the underlying shares or doesn't believe there's fair value in the event of selling its shares.

2. Diversification

ETFs also provide built-in diversification due to the way the product is designed. You have probably heard the old saying 'don't put all your eggs in one basket.' An ETF automatically avoids this by allocating your holdings across several assets, depending on the type of ETF.

For those who are newer to investment markets, ETFs can help simplify the investment process by bundling assets such as shares or bonds into a single fund, offering investors instant diversification.

For example, an ETF that tracks the ASX200 includes shares from 200 different companies that are listed on the Australian exchange. This reduces the impact of any single company's poor performance, helping new investors manage risk more effectively.

In some cases, investors can buy an ETF that will cover thousands of different companies across the world, while others will be more asset or sector specific.
This means investors can gain exposure to a broad market or sector without needing the knowledge to pick individual stocks - making it easier to get started with a diversified portfolio. As such, they can be a good entry point for new investors looking to get into the market.

3. Demystify investing for new investors

Investing in managed funds can seem overwhelming to beginners, with intricate forms and fee structures and high minimum investments that can be confusing for those without a strong financial background.

However, investing in an ETF is like investing in ordinary shares. No complex forms or convoluted fee structures allows an investor at any level to easily access sharemarkets.

4. Low cost

Additionally, ETFs can be cost effective. Some passive ETFs have lower fees compared with managed funds and can be bought and sold on major stock exchanges throughout the trading day, just like individual stocks. The downside to these passive ETFs is they will produce the average return for the market. An active ETF, which might have a higher fee, can outperform its benchmark, depending on the skills of the fund manager.

This accessibility and affordability make ETFs an attractive option for new investors looking to start investing without a significant upfront cost.

Although costs will vary depending on the structure and type of ETF, if you are looking to understand the fees on a particular ETF, you can read the product disclosure statement which will outline all the relevant information.

5. Access benefits of global markets

ETFs also make it easier for investors to access numerous types of investment markets. Whether it is investing in international share markets, bonds, currencies, commodities or even crypto assets, there is an ETF that will suit your needs.

The aim of buying ETFs across various parts of the world is it can be a useful diversification tool because you are reducing the impact of market volatility in any single location. The Australian market represents only a small portion of the global market capitalisation (less than 2%) and the Australian market is also heavily concentrated in financials and materials sectors, which may limit your overall diversification and potential growth opportunities.

Investing globally helps spread your risk across different economies and regions, reducing the impact of any single country's market fluctuations on your portfolio.

ETFs are also run by professional investment managers, with each typically giving investors the type of exposures they would otherwise struggle to find themselves. Janus Henderson Active ETFs provide investors with access to the expertise of our professional investment managers globally, with a deep-rooted research culture underpinned by our 90-year track record of investing.

An example of how ETFs can provide greater access for investors can be found when buying globally diversified bonds. Traditionally, these have been reserved for more affluent Australians, with the minimum buy in usually starting out at $500,000. But with ETFs, you get access to the same fund managers, but at a much lower starting point.