Exchange-traded funds (ETFs) are becoming a top choice for Australian investors. In 2024, a clear preference has emerged, with 86% of ETF inflows going towards passive, index-based ETFs. According to Vanguard, this trend highlights investors' desire for simple, cost-effective ways to diversify their portfolios.

Why Are Index-Based ETFs Becoming So Popular?

ETFs allow investors to trade a basket of stocks on the market, similar to individual shares, providing instant diversification. Research shows that from January to July 2024, $17.55 billion was invested in ASX ETFs, with $14.99 billion going into index-based funds. These passive funds are designed to track the performance of specific market indices, offering stable returns without the need for active stock picking.

In July 2024 alone, ETF inflows hit $6.7 billion, a significant increase from June’s $2.5 billion. This has pushed the total assets under management in the Australian ETF market to a record $208.75 billion.

What Makes Index-Based ETFs an Attractive Investment?

Lower management fees and consistent performance are two key reasons index-based ETFs are favoured by investors. These funds track market indices like the S&P/ASX 200 and aim to replicate their returns. They don’t aim to outperform the market, but they come with lower costs compared to actively managed funds.

Additionally, ETFs offer diversification with a single trade. For instance, the Vanguard Australian Shares Index ETF (ASX: $VAS) tracks the S&P/ASX 300, giving investors access to Australia's largest companies, such as Commonwealth Bank of Australia (ASX: $CBA), BHP Group Ltd (ASX: $BHP), and CSL Ltd (ASX: $CSL).

Which Index-Based ETFs Are Popular in 2024?

Several index-based ETFs have drawn significant attention this year, including:

• Vanguard US Total Market Shares Index ETF (ASX: $VTS): Tracks the US market with exposure to a broad spectrum of American stocks.
• Vanguard Australian Shares Index ETF (ASX: $VAS): Follows the S&P/ASX 300, covering the top 300 companies in Australia.
• iShares S&P 500 AUD ETF (ASX: $IVV): Tracks the US S&P 500, giving access to 500 of the largest US companies.
• BetaShares Australia 200 ETF (ASX: A200): Follows the S&P/ASX 200, focusing on Australia’s 200 largest companies.

These ETFs provide exposure to both domestic and global markets, offering investors an easy way to diversify.

How Do Index-Based ETFs Compare to Actively Managed ETFs?

While index-based ETFs dominate investor inflows, actively managed ETFs still play a role. The key difference lies in their approach:

• Index-Based ETFs: Aim to mirror the performance of a specific index. They offer lower fees and passive management, making them ideal for long-term investors seeking market returns.
• Actively Managed ETFs: Involve active stock picking with the goal of outperforming the market. These funds come with higher fees due to the increased involvement of fund managers.

While actively managed ETFs offer potential for higher returns, they carry greater risk and cost. Index-based ETFs provide predictable, broad market exposure at lower fees.

How Big Is the ASX ETF Market in 2024?

The ASX ETF market has experienced substantial growth in 2024. By the end of July, there were 357 ETFs listed on the ASX, up from 325 at the start of the year. Of these, 243 are index-tracking ETFs, giving investors a wide variety of options to match their financial goals and risk tolerance.

One standout ETF in 2024 is the Vanguard Australian Shares Index ETF (VAS), the most traded ETF on the Selfwealth platform. Interestingly, Gen Z investors are showing a growing interest in ETFs, highlighting a broader trend towards passive investing among younger Australians.

Why Are Investors Choosing Index-Based ETFs for Long-Term Growth?

Investors are increasingly opting for index-based ETFs due to their low-cost, diversified, and stable growth potential. In 2024, 86% of ETF inflows went to passive funds, reflecting a preference for predictable, long-term returns over short-term gains. The cost efficiency of these ETFs, with lower management fees, makes them attractive, especially as they track established indices like the S&P/ASX 200.

Diversification is a major benefit, allowing investors to gain exposure to a wide range of sectors and companies with a single investment, spreading risk. Funds like the Vanguard Australian Shares Index ETF (ASX: VAS) provide access to the top 300 ASX companies, making it easier to build a balanced, resilient portfolio.

Ultimately, the appeal of index-based ETFs lies in their simplicity, reliability, and alignment with long-term financial goals. They offer a steady path to growth, making them a key choice for both new and experienced investors.