Picking the best Australian Shares ETFs

There's a lot to love about Australia, such as the stunning landscapes, sun-soaked beaches, amazing flora and fauna, and an enviable location. Australia also boasts strong governance, consistent economic growth, an abundance of minerals, world-class infrastructure, and a highly skilled and innovative work-force.

The decision to own Australian shares makes a lot of sense, and one of the best ways to do so is via a diversified Australian Shares ETF.

We have selected seven ETFs that we believe will be great long-term performers.

In selecting the list, we have focused on key criteria such as diversification levels, MER (Management Expense Ratio), the quality of the investment manager, fund size, liquidity, tracking error, and performance.

Of these criteria, two of the most important are the diversification levels and the MER. Diversification helps to reduce stock-specific and sector-specific risk, whilst a low MER means that more of the returns are going to the investor, which helps long-term compounding.

The best Australian ETFs

Here are seven of the best Australian ETFs that we believe will be great long-term investments.

It should be noted that STW was a late inclusion to the list, given that on 1 November 2023 its MER was slashed from 0.13% p.a. to 0.05% p.a. This is welcome news, and part of a continual process of fee reductions amongst ETF investment managers.

When viewing the ETFs in the table below, it can be seen that there are similarities in the performance across ETFs.

One reason for this is the similarities in the respective indices, in that all (except the MVIS Australia Equal Weight Index) are weighted by market capitalisation, and thus heavily influenced by the performance of Australia's biggest companies such as BHP, CSL, and the big banks.

There will, however, be some slight differences in performance from year to year, as for example, in one-year large caps might outperform, whilst in the following year mid-caps could outperform. This is why we should always remember that past performance is not indicative of future performance.

The following table summarises the performance of each ETF as of 31 October 2023.

iShares Core S&P/ASX 200 ETF (IOZ)

IOZ is managed by Blackrock, which is the largest investment manager in the world. One of the big advantages of any large investment manager is that they provide world class portfolio management. They also provide scale, which enables ultra-low fees.

IOZ, as with STW and A200, is diversified across the 200 largest companies in Australia weighted by market capitalisation.

From a sector perspective, IOZ includes financial stocks 28.6%, materials 24.5%, healthcare 9.1%, industrials 6.9%, and consumer discretionary 6.9%.

The biggest companies in IOZ include BHP 11.0%, CBA 8.2%, CSL 5.9%, NAB 4.3%, and ANZ 3.7%.

SPDR S&P/ASX 200 Fund (STW)

Historically, State Street's STW and SFY were the first ETFs to list in Australia in August 2001.

STW, also tracks the S&P/ASX 200 index, and now has an MER of 0.05% p.a., which is in line with IOZ. Given this recent MER fee drop, the performance of IOZ and STW should be very similar going forward.

BetaShares Australia 200 ETF (A200)

A200 is very similar to IOZ and STW, except it has a slightly lower MER of just 0.04% p.a., which makes it the lowest cost Australian Shares ETF in the market.

This fee difference however of 0.01% (compared to IOZ and STW) is small, and is in fact equivalent to just a cup of coffee a year for every $50,000 invested.

So, for just 0.01%, it's probably not worth making the switch, especially if selling your existing ETFs will result in any capital gains tax. The other consideration is that as per Murphy's Law, as soon as you make the switch, your original ETF provider will drop their fees to match or even beat your new ETF fees.

An interesting aspect to A200 is that it tracks the Solactive Australia 200 index. This index still tracks the 200 largest companies in Australia weighted by market capitalisation, but there are a couple of slight differences in the way it constructs its index, compared to the S&P/ASX 200 index.

Vanguard Australian Share Index ETF (VAS)

VAS has the title of being the biggest ETF in Australia with $12.7bn of AUM (Assets Under Management).

Different to IOZ, STW and A200, it invests in the biggest 300 companies in Australia, which makes it slightly more diversified as it contains more mid-cap stocks.

Its management fee is a relatively low 0.07% p.a., and the biggest companies it holds include BHP 10.4%, CBA 7.8%, CSL 5.6%, NAB 4.2%, and ANZ 3.6%.

From a performance perspective, its 5-year figures still closely align with the ETFs that track the ASX 200

SPDR S&P/ASX 50 Fund (SFY)

State Street's SFY differs from the other ETFs in this list, in that it's slightly less diversified, but still diversified enough for those wanting exposure to just the biggest companies in the Australian Market.

The biggest companies in this ETF include BHP 14.0%, CBA 10.4%, CSL 7.4%, NAB 5.5% and ANZ 4.5%.

One reason why people may choose this ETF is a belief that bigger companies are more financially stable than smaller companies. Long-term returns, however, do show performance similarities between the indices.

SFY is the only ETF in the market that tracks the ASX50.

Vanguard Australian Shares High Yield ETF (VHY)

VHY's point of difference is that it focuses on companies that have a higher dividend yield relative to other companies in the ASX.

The ETF has 75 holdings, with its biggest holdings including BHP 10.3%, CBA 9.6%, NAB 7.3% and ANZ 6.2%.

The ETF excludes REITs from its fund, and achieves diversity by restricting the portion of any one industry to 40%, and any one company to approximately 10%.

VanEck Australian Equal Weight ETF (MVW)

For an ETF with a totally different concept to ETF investing, I have included MVW, which is an ETF that maintains close to 'equal weight' on 80 of the biggest companies on the ASX.

This is interesting because standard ETFs are weighted to the market capitalisation of each company within the ETF. For instance, BHP makes up around 11% of ETFs that are based on the S&P/ASX 200. In this ETF however, BHP makes up just 1.3% of the fund.

What this means is that investors are less exposed to falls in the bigger companies like BHP, CBA and CSL.

Some studies show that equal weight indices outperform slightly over long periods, though they underperform when the indices biggest companies are outperforming.

Conclusion

When considering ETFs with wide diversification, low fees, and good long-term performance, all the above ETFs fit the bill.

InvestSMART understands the value of Australian ETFs in a diversified portfolio, and as such, IOZ can be found in InvestSMART's diversified PMA portfolios.