5 myths about ASX ETFs debunked

ASX exchange-traded funds provide an easy way for investors to build a diversified low-cost investment portfolio.

ETF written on wooden blocks with a magnifying glass.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

sdf

ASX exchange-traded funds (ETFs) are an increasingly popular option, especially for younger investors who do not have the time or motivation to select individual stocks for investment.

ASX ETFs are particularly useful for easy international investing.

Over the past two years, Aussies have poured millions into ASX ETFs holding US shares to take advantage of the vastly outperforming American market, led by the Magnificent Seven.

However, experts at online trading platform SelfWealth Ltd (ASX: SWF) say some misconceptions about ASX ETFs remain in the marketplace today.

So, let's bust those myths right now.

5 myths about ASX ETFs

According to SelfWealth, these are the five persistent myths about ASX ETFs today.

Myth 1: ETFs deliver the same performance as their underlying indices 

Passively managed ETFs seek to mirror the returns of an underlying indices, or index.

The ETF manager does everything possible to replicate the index's returns, but there are inevitably "tracking differences".

For one thing, you've got to pay the ASX ETF manager a fee for their services. So, that reduces the total return compared to the index.

Selfwealth says other differences may be caused by the replication method used to track the index and the timing of transactions undertaken to keep the ASX ETF in line with the index.

Myth 2: ASX ETFs only suit a certain type of investor

Simply not true. ETFs are suitable for all types of investors and investment goals.

Myth 3: You should choose the ASX ETF with the lowest cost

The adage that 'you get what you pay for' is true.

You'll pay a very low fee for ETFs tracking market capitalisation-weighted indices.

This is because they are easier for managers to run. They simply adjust the ETF's holdings to copy stock weightings based on market caps. No stock analysis or assessment is required.

For example, the most popular ETF on the market, the Vanguard Australian Shares Index ETF (ASX: VAS), simply tracks the market-cap-weighted S&P/ASX 300 Index (ASX: XKO).

The VAS ETF charges an annual management expense ratio (MER) of 0.07%.

Since its inception in 2009, this ETF has delivered a total average annual return of 9.41%.

You'll pay more for an actively managed ASX ETF where the manager is required to regularly re-assess the ETF's holdings based on more complex investment metrics.

The Airlie Australian Share Fund (ASX: AASF) aims to provide long-term capital growth and regular income by investing in a concentrated portfolio of 15 to 35 ASX shares.

So, the Airlie investment team has to research and continually re-assess stocks to keep the ETF in good shape. The AASF ETF charges an MER of 0.78% per annum.

Since its inception in 2018, this ETF has delivered a total average annual return of 10.89%.

Myth 4: ETFs with the highest returns are best

This same rule applies to individual shares: Past performance is not an indicator of future performance.

Selfwealth experts say reviewing an ASX ETF's history may be helpful in your research.

However, the history should be considered alongside other criteria like financial goals and risk tolerance.

Myth 5: ETFs can only provide broad exposure

ETFs are certainly known for broad exposure because, by nature, they involve a basket of stocks and, therefore, guarantee some degree of diversification in a single trade.

Selfwealth analysts remind investors that there are also a significant number of ETFs with a narrow focus designed to achieve a specific investment objective.

They say:

For example, investors can invest in ETFs that choose to focus on exposure to specific sectors, industries, themes, assets and even geographic regions.

ETFs may even follow rules that influence holdings selection and weight.

In this respect, some ETFs don't offer the same level of diversification that a broad market-tracking fund might, but they will still offer some level of diversification by virtue of the number of holdings in the fund.

Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ETFs

A man with a wide, eager smile on his face holds up three fingers.
ETFs

3 reasons why the iShares S&P 500 ETF (IVV) is a great long-term buy

I think this fund offers lots of what investors should look for.

Read more »

green etf represented by letters E,T and F sitting on green grass
ETFs

How have these thematic ASX ETFs performed in 2025?

Has thematic investing been a viable strategy this year?

Read more »

Hologram of a man next to a human robot, symbolising artificial intelligence.
ETFs

This fantastic ASX ETF could win big from the AI boom over the next decade

Want to invest in AI? This could be an easy way to do it.

Read more »

A smiling woman holds a Facebook like sign above her head.
ETFs

The ultimate ASX ETFs to buy right now

Let's see what sort of stocks these funds are invested in.

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
ETFs

Overinvested in Vanguard Australian Shares Index ETF (VAS)? Here are two alternative ASX ETFs

The VAS ETF isn’t the only fund on the ASX worth buying.

Read more »

A laughing woman wearing a bright yellow suit, black glasses and a black hat spins dollar bills out of her hands signifying the big dividends paid by BHP
ETFs

How to grow your wealth the easy way with ASX ETFs

Is this the easiest way for investors to build a nice nest egg? Let's find out.

Read more »

Oil rig worker standing with a clipboard.
ETFs

Up 18% in June, is the Betashares Crude Oil Index ETF a good oil price play?

ASX investor interest in the OOO ETF has risen amid surging oil prices due to the Israel-Iran conflict.

Read more »

Man holding Australian dollar notes, symbolising dividends.
ETFs

Buy these ASX ETFs for passive income

Want an easy way to generate income from the share market? Check out these funds.

Read more »