An exchange-traded fund (ETF) is a type of investment that tracks the performance of a basket of securities, such as stocks, bonds, commodities, or currencies. An ETF can offer investors a simple and cost-effective way to diversify their portfolio and gain exposure to different markets or sectors.
One of the most popular ETFs in Australia is the ASX 200 ETF, which aims to replicate the returns of the S&P/ASX 200 Index (ASX: XJO). The ASX 200 is a benchmark index that represents the 200 largest and most liquid companies listed on the Australian Securities Exchange (ASX).
There are several ASX 200 ETFs available for investors to choose from, such as the Vanguard Australian Shares Index ETF (ASX: VAS), the BetaShares Australia 200 ETF (ASX: A200), the SPDR S&P/ASX 200 ETF (ASX: STW), and the iShares Core S&P/ASX 200 ETF (ASX: IOZ). Each of these ETFs has its own features, such as management fees, dividend yields, tracking errors, and liquidity.
But what are the pros and cons of investing in an ASX 200 ETF? Here are some factors to consider before buying or selling these funds.
Pros of investing in an ASX 200 ETF
- Low-cost diversification: One of the main advantages of investing in an ASX 200 ETF is that it allows investors to access a broad range of Australian blue-chip stocks with a single purchase. This can reduce the transaction costs and time involved in buying individual shares. Moreover, most ASX 200 ETFs have very low management fees compared to active fund managers. For example, the A200 ETF has an annual fee of just 0.04%, while the VAS ETF charges 0.07% per year.
- Stable income: Another benefit of investing in an ASX 200 ETF is that it can provide investors with a steady stream of dividend income. The ASX 200 index has a relatively high dividend yield compared to other markets, as many Australian companies pay out generous dividends to their shareholders. According to BetaShares, the A200 ETF had a 12-month distribution yield of 6.5% as of August 2021.
- Market performance: Investing in an ASX 200 ETF can also give investors exposure to the overall performance of the Australian share market, which has historically delivered positive returns over the long term. According to Vanguard, the VAS ETF had an average annual return of 9.7% over the past five years, and 8.4% over the past 10 years.
Cons of investing in an ASX 200 ETF
- Sector concentration: One of the main drawbacks of investing in an ASX 200 ETF is that it exposes investors to a high concentration of certain sectors, such as financials and materials. These two sectors account for more than half of the index’s weight, and are dominated by a few large companies, such as BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), and National Australia Bank Ltd (ASX: NAB). This means that investors may face higher volatility and risk if these sectors or companies underperform or face regulatory or environmental challenges.
- Lack of growth: Another disadvantage of investing in an ASX 200 ETF is that it may limit investors’ potential for growth, as most of the companies in the index are mature and established businesses with low earnings growth rates. Investors who are looking for higher returns or exposure to emerging sectors, such as technology or healthcare, may find better opportunities elsewhere. For example, the S&P/ASX All Technology Index (ASX: XTX) has outperformed the ASX 200 index by more than 40% over the past year.
- Tracking error: Investing in an ASX 200 ETF also involves some degree of tracking error, which is the difference between the fund’s performance and that of its underlying index. Tracking error can arise due to various factors, such as fees, taxes, rebalancing, market movements, or liquidity issues. While most ASX 200 ETFs have low tracking errors, they are not guaranteed to match the index’s returns exactly.
