ETFs have transformed the way Australians invest. They are simple to buy, generally low-cost, transparent and have made it easier than ever for investors to build diversified portfolios.

Simplicity can sometimes hide complexity.

In our latest Investing Compass episode, we take a closer look at some of the most popular ETFs held by Australian investors and ask a simple question: what do you actually own when you buy an ETF?

Many investors buy ETFs because they offer exposure to hundreds or thousands of companies with one investment, but the underlying index, sector exposure and largest holdings can tell a very different story.

A fund that appears diversified at first glance may have significant exposure to a particular country, industry or a small group of companies driving returns.

In this episode, we go under the hood of four of the ETFs most commonly found in Australian portfolios.

You can find the full article here.

Shani’s article on concentration is here.

Below you can find more of our insights on ETFs:

Young & Invested: Why we just downgraded this ETF you might own. A ratings shift that could matter for your portfolio.

Unconventional wisdom: ASX ETF and LIC dividend champions. Lessons from ETFs and LICs that have delivered over the last decade.

The best international share ETF. We take a look at the most popular global ETFs and the investors they may suit.

Future Focus: Build a 3 ETF portfolio in 2026. As valuations temper and market returns become subdued, focus on keeping more of what you earn.

Top-rated all in one ETF. A simple and effective low-cost multi-asset solution.

Under the hood of the ETFs you are most likely to own. Take a closer look at the exposure you’re getting with the most popular ETFs in Australia.

ETF Spotlight: Looking for effective exposure to Australia’s listed property sector. With property under pressure and yields shifting, I take a look at the best way to access the A-REIT sector.

Top rated quality ETF. This offering receives the top rating from our analysts.

Young & Invested: Is your ETF really worth the price you’re paying? We’ve devised a new metric to reveal whether your ETF is competitively priced.

Young & Invested: Can this ETF solve the ASX’s concentration problem? When half your ETF goes into ten companies, it pays to look for alternatives.

The most popular ETFs in SMSFs. A look into the funds Aussie investors are backing.

Young & Invested: What we think about the biggest ETFs on the ASX. The latest insights on popular picks from our Morningstar analysts.

Unpacking Vanguard’s new tech ETF. A closer look at the provider’s new thematic offering.

You can find the transcript to the episode below:

Mark LaMonica: Thanks to PocketSmith for sponsoring today’s episode. PocketSmith tracks your spending, income, and investments all in one place so you get a holistic view of your finances. PocketSmith has a special deal for Investing Compass listeners. Get 50% off your first two months of the PocketSmith Foundation or Flourish Plans. To get your deal, go to pocketsmith.com/investingcompass or find the link in the podcast notes.

Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. Does not take into consideration your personal situation, circumstances, or needs. So anyone who’s watching the video can see that there’s something in front of your computer. What is that, Shani?

Shani Jayamanne: It’s our book. Invest Your Way. Or as Mark likes to call it, invest in your way.

LaMonica: So I forgot the title of the book a couple of times. But what do you think, Shani? Should people buy this book?

Jayamanne: I think you should buy it. We were saying that it has multiple uses. You can read it. You can create an investment strategy out of it. You can use it as a coaster. You can throw it at something.

LaMonica: Oh, well, we’re certainly not promoting violence. But anyway, buy the book, read the book. Even if you don’t read the book, you can leave a nice review for us on Goodreads.

Jayamanne: Booktopia, Amazon, anywhere where you bought the book would really help us out.

LaMonica: Yeah, we would appreciate that. It will get our publisher off our back.

Jayamanne: Sounds good.

LaMonica: Okay. So what are we talking about? This is a blast from the past, Shani.

Jayamanne: It is. We’ve done this podcast before back in 2022, which was early Investing Compass days.

LaMonica: Do you even remember 2022?

Jayamanne: No, I don’t actually. But it’s one of the most popular episodes that we’ve ever done. And it’s really about going back to basics. And a lot of Aussies are using ETFs as a foundation of their portfolio.

LaMonica: And they’re attractive for several reasons. So they’re typically low cost. They’re transparent. They’re easy to buy and sell. And that has obviously led a lot of people to use them as building blocks for their portfolio. They’ve really made investing simple, but that doesn’t negate the responsibility to actually know what you’re investing in. One of the cardinal rules of investing.

Jayamanne: Exactly. And part of being a successful long-term investor is understanding what you own. And that matters even more when a handful of ETFs now dominate many Australian portfolios.

LaMonica: And the name of an ETF might give you a general understanding of what you’re investing in. It might indicate that it’s diversified, but those underlying exposures might tell a completely different story. And it’s important that investors are aware of that. The Vanguard MISCI Index International Shares ETF, the ticker symbol’s VGS. And we’ve seen a trend where Aussie investors are typically much more comfortable investing in individual shares in Australia. So Australian individual shares, they know the market, they know the companies, it’s relatively affordable to do.

Jayamanne: And with international equities, they’re a much larger pool. They’re harder to access and harder to choose from. So an international shares ETF doesn’t just appeal to who you would traditionally consider just a pure ETF investor, but also to many investors that would want the hard work taken out of their hands for international share exposure.

LaMonica: Okay, let’s get into the ETF. So it tracks the MISCI World EX Australia Index. And that gives investors exposure to large and mid-cap companies across developed markets. So that sounds like it’s really broadly diversified. But the ETF holds, and it is in theory because it holds companies across North America, Europe and Asia. But then if we start looking at that underlying portfolio, it’s a little bit of a different story, Shani.

Jayamanne: So the United States dominates the index, typically making up around 70% of the portfolio. Technology companies also play an outsized role with names like Apple, Microsoft and NVIDIA sitting amongst the largest holdings.

LaMonica: So that means an investor who might be using VGS to try to get a globally diversified portfolio is really heavily reliant on the performance of the U.S. market and then increasingly a small group of mega-cap technology companies. So 27% of the ETF is in tech.

Jayamanne: And we’re not saying that this makes it a bad investment. These businesses have generated extraordinary earnings growth and shareholder returns over the last decade. Investors should understand that VGS is not evenly spread across the world’s economy. It is a large bet on developed markets, particularly in the U.S.

LaMonica: And the ETF is unhedged. So what that means is movements in the Australian dollar can materially impact returns. So a falling Aussie dollar tends to boost returns for local investors, and a rising Aussie dollar reduces those returns.

Jayamanne: All right, so let’s move on to the second and that is Vanguard Australian Shares Index ETF with the ticker symbol VAS. This ETF has $24.3 billion of funds under management and VAS tracks the ASX 300, the largest companies by market cap in Australia.

LaMonica: But Australia, much like the U.S. and the globe, is also highly concentrated. So there are financials and materials that dominate the index. So that means investors are heavily exposed to banks and miners. So mid-May, the top two companies make up over 20% of the index. The top 10 make up 47%. Financial services and materials make up over 55% of the index.

Jayamanne: And this concentration reflects the structure of the Australian market. But unlike the U.S., Australia has relatively few technology companies. So this creates opportunities and risks for us as investors.

LaMonica: Australian shares have typically delivered attractive dividend income and franking credits, which of course appeal to more income focused investors like myself. But the concentration in cyclical sectors means returns can be heavily influenced by the housing market, commodity prices, and the domestic economy. And you’ve written an article on this, Shani, and you wrote it for the AFR. And Shani’s in the AFR like every other day. So she wrote it for the AFR, but we also republished it on Morningstar, so we’ll link that in the show notes.

Jayamanne: But ultimately with VAS, it’s important that you’re using this ETF as a building block. And if you are, understand that instead of being diversified, you’re relatively concentrated on two sectors. And it’s top heavy, so it’s heavily invested in the largest companies in Australia.

LaMonica: I feel like we have talked about this a lot, but we’ve talked about the alternative to a market capitalization weighted index is an equal weighted index. So things are not concentrated by size instead, every holding has an equal amount of investment in it.

Jayamanne: And you invest in an ETF that is equal weighted Mark for the Australian market. So that is MVW. Do you want to speak a little bit about your choice here?

LaMonica: Yeah, I mean, basically, it’s just I don’t like, we went through all that concentration, and certainly the concentration, I don’t like banks, I don’t like miners, I just don’t like the business model. I don’t particularly see a lot of growth, particularly in the banking industry in Australia. And so I just want to avoid having a concentrated portfolio in those sectors, in some of those companies that are the largest companies in Australia. I think the prospects are better for more mid cap companies. Now, this comes with a pretty big downside. So and the downside is, of course, to keep it equal weighted, it needs to be rebalanced. When it’s rebalanced, there are transaction costs and capital gains are generated, which then get distributed to investors, including me, and you have to pay tax on them. So there are downsides. So I think, it’s not as simple as trying to make an argument over what’s more attractive. It’s also thinking about those downsides as well.

Jayamanne: PocketSmith directly connects to your accounts, so there’s no manual tracking. It offers cashflow forecasts so you can properly plan and transparency to make better decisions.

LaMonica: We’ve been using it ourselves. And what stands out is how it brings everything together in one place. You can see your spending, your income, your investments. And it gives you a proper view of your net worth. If you’re trying to get a clear picture of your finances alongside your investing, PocketSmith has a special deal for Investing Compass listeners. Get 50% off your first two months of PocketSmith’s Foundation or Flourish plans to get your deal. Go to pocketsmith.com/investingcompass or find the link in the podcast notes.

But let’s move on from me. And that is the iShares S&P 500 ETF with the ticker symbol IVV with $13.4 billion of funds under management. And as you probably figured out from the name of this ETF, IVV tracks the S&P 500. And over the past decade, if you own this ETF or had exposure to the S&P 500, you’re probably very happy because things have gone very, very well.

Jayamanne: If you invested $10,000 in IVV 10 years ago, you would have $41,591. And that is a pretty good return. But it has been helped by concentration. So the largest technology companies now make up a significant portion of the index. 39% of the index is in the top 10. And that’s at mid-May. NVIDIA makes up 8.59% of the index of 500 stocks. Apple is 6.87%.

LaMonica: And we’re obviously talking a lot about it. Concentration here. But concentration works really well when those big companies outperform the other companies. And that’s what’s happened with the S&P 500. So these businesses have certainly benefited from a lot of different structural trends like cloud computing and now moving on to AI. And that’s great and that’s worked well in the past. But it does mean going forward, investors are increasingly reliant on a relatively small group of companies to continue to outperform and deliver this exceptional earnings growth.

Jayamanne: And when investors think of the S&P 500, it is normally thought of as representative of the US economy. But many of the largest companies in the index generate substantial revenue globally. So you’re not just buying US exposure, but to some of the world’s largest multinational businesses. And this may or may not be what you’re looking for, but it’s important to know this when you are buying in.

LaMonica: All right. Should we do another one with a lot of concentration?

Jayamanne: Yeah.

LaMonica: All right.

Jayamanne: Can this be the last one?

LaMonica: It can be the last one. Do you have somewhere to go? Shani does have big plans tonight. You are...

Jayamanne: Please don’t share these plans.

LaMonica: OK. They are the domestic variety involving some cleaning.

All right. So the last one, the Betashares NASDAQ 100 ETF with the ticker symbol NDQ. It has $9.7 billion in funds under management. And we’ve seen a lot of investors gravitate towards NDQ because it has done really well and they do want exposure to the tech sector and the growth of AI.

Jayamanne: And the ETF tracks the NASDAQ 100 index, which contains 100 of the largest non-financial companies listed on the NASDAQ exchange. This ETF includes household names like Apple, Microsoft and Amazon. It is less like a broad market ETF and more so exposure to US tech and communications companies.

LaMonica: And these two sectors, tech and communications, makes up almost 70% of the index. That makes the ETF far more concentrated than many investors probably realize. So the performance of a handful of mega cap growth stocks will drive returns in NDQ.

Jayamanne: And this concentration can both amplify both gains and losses. So it’s important that you think about this before investing because it influences performance and volatility. So what you’ll see is during periods of strong growth and falling interest rates, NDQ has delivered exceptional returns. Growth-focused companies can also experience sharp drawdowns when valuations do come under pressure.

LaMonica: And one thing you probably noticed if you’ve been listening carefully, three of the ETFs we talked about today, so VGS, NDQ and IVV, we’ve told a little bit of the same story here. So a lot of investors will buy those three different ETFs, which seem like different things and think that they are diversifying their portfolio. But in reality, there’s a lot of overlap between these three ETFs. So holding two or three of these ETFs is just increasing your exposure to US technology companies.

Jayamanne: So why does this all matter? Why does understanding your ETF matter? All of the ETFs listed above are passive investments. This means that there’s no active decisions that are behind what these ETFs hold, and instead, they track indexes. This often means that the ETFs are cheaper, but there are no controls for exposure and concentration. And it’s important that you understand the indexes that are being tracked, the exposure that they provide and how they behave through different market conditions.

LaMonica: And we’ve tried to hammer that home, this concentration risk. So all of them have concentration risk, either to a certain geography, sector or industry, or maybe all three. So this doesn’t mean that investors should avoid these ETFs. They can be sensible, long-term building blocks or a portfolio. It is important, though, that with everything else, like everything else with investing, you understand the risks and exposures that you have. You understand how each holding you have interacts with other parts of your portfolio and, of course, how all of these investments connect to the goals that you’re trying to achieve.

Jayamanne: You’re probably wondering about your other holdings, and you can do this exercise on your own, completely for free through Morningstar. So search for your ETF and then navigate to the portfolio tab. And that’s where we have our portfolio x-ray tool that allows you to understand the exposures in your ETF, the underlying holdings and the risks that you’re taking on.

LaMonica: And then one more resource for everyone. So Shani’s article on this is linked within the show notes. Within that article, this is like those Russian dolls. Within that article is another link that link goes to our colleague, Sim’s article, and she writes about what the analysts, what our analysts at Morningstar think about all three of these ETFs.

All four of these ETFs. Anyway, thank you very much for joining us. I will try to learn to count by the next podcast we have, but we would appreciate any comments that you have on the podcast or on our book.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)

Invest Your Way

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For the past five years, we’ve released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.

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