Investing in ASX Index Funds: Top Index Funds in Australia

Investing in ASX Index Funds: Top Index Funds in Australia

Rather than investing in a single share, index funds give you the opportunity to invest your money across a broad range of financial assets in just a single trade, providing instant diversification benefits at a low cost.

In this article, we look at how to invest in ASX index funds and why they may be worth considering for your share portfolio.

A casually dressed woman at home on her couch looks at index fund charts on her laptop
Image source: Getty Images

What is an index?

To understand what an index fund is, it’s essential to first know what we mean when we talk about an ‘index’. In finance-speak, an index refers to a collection of stocks, bonds, or other financial assets grouped based on specific criteria and weighting.

For example, the S&P/ASX All Ordinaries Index (ASX: XAO) – or ‘All Ords’ to its friends – is the oldest index in Australia and consists of the 500 largest ASX companies weighted according to their market capitalisation. The index's composition will change as companies grow, merge or de-list from the exchange, but it provides a consistently good proxy for the returns of the overall Australian share market.

The All Ords is a broad index covering the majority of shares on the market, but shares and other financial assets can be grouped based on all sorts of criteria, creating a range of different indices. Some indices focus on specific industries or sections of the market, like the technology and healthcare sectors. 

There are indices based on specific investment themes or styles, like high-growth or value shares or companies that pay high dividends. Some indices comprise shares in international markets, or just local markets, or combinations. There are even indices based around emerging macro trends, like companies that may benefit when interest rates rise.

There is an index for just about everything – including indices for other financial assets like bonds, commodities, currencies, and even cryptocurrencies!

What is an index fund?

An index fund is designed to mirror the performance of a specific index of stocks, bonds, or other financial assets. The fund manager raises money from investors by selling units in the fund, which it then uses to buy assets matching the make-up and composition of the index it has chosen to track.

For example, if you invested in a fund that tracked the All Ords index, you would actually own a small piece of each of the individual 500 companies that comprise that index. This is what makes index funds such a powerful investment, particularly for individual retail investors. You can quickly diversify your portfolio across a broad basket of stocks, bonds, or other assets in just a single trade.

In exchange for administering the fund and ensuring it always closely matches the index's composition, the fund manager will collect an annual management fee. These fees are usually expressed as a percentage of your investment. They will often vary depending on the fund, so checking how much you’ll be paying in fees before investing is important.

For example, if a fund charges an annual management fee of 0.1%, you’ll be paying $10 in annual fees for every $10,000 invested.

There are many different types of index funds out there, but the ones that typically list on the ASX are called exchange-traded funds (ETFs). These are funds that trade on the share market more or less like ordinary shares, making them easily accessible for the everyday investor.

Why invest in ASX index funds?

We’ve already covered the key benefit of index funds: diversification. Index funds enable everyday investors to invest their money across a broad range of assets at comparatively low cost.

We all know we shouldn’t put all our eggs in one basket – if the basket breaks, we lose all our eggs. The same holds for investing in the financial markets. We don’t want to put all our money in one company in case it goes bust. But true diversification can be very difficult to achieve for the individual investor.

Imagine trying to invest in every company in the All Ords index – not only would you require the capital (and patience!) to invest in all those individual companies, but you would also incur brokerage and other transaction fees every time you executed a trade. These fees add up quickly and can make diversifying seem prohibitively expensive.

But herein lies the magic of index funds. In just one trade (with one brokerage fee!) you can invest your money into a class of assets that aligns with your investment goals. Rather than investing $1,000 in Cochlear Limited (ASX: COH), you could invest the same $1,000 in the iShares Global Healthcare ETF AUD (ASX: IXJ), which gives you instant exposure to some of the largest biotechnology, healthcare, and pharmaceutical companies in the world.

Many index funds also pay out regular dividends to their unit-holders – generally called ‘distributions’.

5 top index fund performers in FY22
(based on market capitalisation from high to low)

Company Market capitalisation Benchmark index
Vanguard Australian Shares
Index ETF
(ASX: VAS)
$10.6 billion S&P/ASX 300 Index (ASX: XKO)
iShares S&P 500 ETF AUD (ASX: IVV) $5.1billion S&P 500 Index (SP: .INX)
SPDR S&P/ASX 200 (ASX: STW) $4.8 billion S&P/ASX 200 Index (ASX: XJO)

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

$4.7 billion S&P ASX 200 Accumulation Index
Vanguard MSCI Index International
Shares ETF
(ASX: VGS)
$2.8 billion MSCI World ex Australian Accumulation Index

Empty heading

Vanguard Australian Shares Index ETF

The Vanguard Australian Shares Index ETF aims to track the performance of the S&P/ASX 300 Index, which comprises the 300 largest companies on the ASX. This includes mining giants like BHP Group Ltd (ASX: BHP), the big four banks, and leading healthcare companies like CSL Limited (ASX: CSL).

It’s important to note that all these funds aim to replicate the performance of their benchmark index before fees, expenses, and tax – which is why it is so important to consider fees before choosing which fund to invest in.

Key metrics:

  • Net assets: $11 billion (as of 29 April 2022)
  • Distribution frequency: quarterly
  • Management fee: 0.1% per annum
  • Net transaction cost: 0.02% per annum

iShares S&P 500 ETF AUD

Managed by global investment management firm BlackRock, the iShares S&P 500 ETF provides instant exposure to the 500 largest companies in the US. This includes globally-recognised brands like Apple Inc, Visa Inc, Pfizer Inc, and Walt Disney Co, among hundreds of others.

Investing in ETFs that track overseas indices is hands down the fastest, easiest, and cheapest way for investors to access a diversified basket of international stocks. Diversifying into international markets can help reduce the volatility of your portfolio and may even improve your overall returns because foreign markets are often influenced by entirely different economic tailwinds to local markets.

Key metrics:

  • Net assets: $5.1 billion (as of 19 April 2022)
  • Distribution frequency: quarterly
  • Management fee: 0.04% per annum

SPDR S&P/ASX 200

Managed by State Street Global Advisors, the SPDR S&P/ASX 200 was the first ETF ever listed in Australia, and aims to match the performance (before fees, etc) of the 200 biggest companies listed on the ASX. Its three largest holdings are BHP, Commonwealth Bank of Australia (ASX: CBA) and CSL.

Key metrics:

  • Net assets: $4.8 billion (as of 19 April 2022)
  • Distribution frequency: quarterly
  • Management costs: 0.13% per annum

iShares Core S&P/ASX 200 ETF

Another BlackRock-managed fund, the iShares Core S&P/ASX 200 ETF is very similar to the State Street fund above, though it tracks the accumulation index, in which all cash dividends are assumed to be reinvested on the ex-dividend date. Consequently, its returns have historically tended to be higher than the S&P/ASX 200, as the reinvested dividends benefit from compounding.

Key metrics:

  • Net assets: $4.7 billion (as of 29 April 2022)
  • Distribution frequency: quarterly
  • Management fee: 0.09%

Vanguard MSCI Index International Shares ETF

The Vanguard MSCI Index International Shares ETF aims to track the performance of the MSCI World ex Australia index, which consists of 1,480 large and mid-cap companies from 22 developed countries across the world. While it is majority-weighted towards large-cap US tech stocks, it also includes shares in companies from Finland, Hong Kong, Israel, Singapore, and the UK, among many others.

Key metrics:

  • Net assets: $4.6 billion (as of 29 April 2022)
  • Distribution frequency: quarterly
  • Management fee: 0.18% per annum
  • Net transaction cost: 0.02% per annum

Are ASX index funds right for you?

ASX index funds are an easy and cost-effective way to quickly gain exposure to a diversified portfolio of shares and other financial assets. But with so many different and increasingly niche funds available, it’s vital to do your research before investing. Many index funds cater to specific investing styles (like growth or value investing), and you should make sure you choose the one that’s right for you.

Before you buy, you should have a firm understanding of your investment objectives and make sure the fund aligns with the historical returns of the index that it is seeking to track. And always consider the fund’s management fees, as these can quickly eat into your potential returns.

Article last updated 12 May 2022. Motley Fool contributor Rhys Brock has positions in Cochlear Ltd. and Commonwealth Bank of Australia. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Apple, CSL Ltd., Cochlear Ltd., Vanguard MSCI Index International Shares ETF, Visa, and Walt Disney. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2024 $145 calls on Walt Disney, long March 2023 $120 calls on Apple, short January 2024 $155 calls on Walt Disney, and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple, Cochlear Ltd., Vanguard MSCI Index International Shares ETF, Walt Disney, and iShares Trust - iShares Core S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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