Index funds are becoming popular on the ASX. According to fund provider BetaShares, August saw a record $7 billion flow into ASX index funds and exchange-traded funds in Australia, pipping what was a previous record of $6.83 billion in July. If you weren't, let's talk about why you might want to change that in September.
More seem to pop up every month, with more than 500 different ETF products now available on the ASX.
One can buy an ETF for almost every investing goal one can think of. Just as there is for buying Korean shares, Japanese stocks, global mining companies, global healthcare companies, banks, defence companies… You name it. ASX investors have never been more spoiled for choice when it comes to ETFs.
The examples are, of course, ASX index funds. Most track the S&P/ASX 200 Index weighted by market capitalisation.
To put it, when you buy an index fund that tracks the ASX 200 or the ASX 300, you are buying a small piece of each of those 200 or 300 companies. To illustrate, an ASX 200 ETF will usually allocate about 11.6% of its portfolio to BHP Group Ltd, but less than 0.5% to smaller stocks like JB Hi-Fi Ltd.
In this way, an index fund is guaranteed to match the performance of its 'market'. Most investors in Australia who choose to buy and invest in individual ASX shares do so to try and beat the market, that is, get a better return than an ASX index fund.