Future Focus: 4 ETFs every investor should know
Build smarter portfolios by separating ETFs into intuitive categories.
Exchange-traded funds (ETFs) have become one of the most powerful parts of the modern investor’s toolkit. As an investor, you’re able to buy a broad slice of the market in a single trade. You have a level of transparency that isn’t typically offered by managed funds in Australia. You’re offered liquidity. And – you’re offered all of this often at very low costs.
The ETF universe has exploded – new funds are entering the market each day. We recently spoke to Shamir Popat from our Manager Research team about the considerations before choosing one, but it can still be extremely hard to start.
There are a handful of intuitive categories that ETFs fall into. Understanding these broad categories, their purpose and the investors they suit will help you make better decisions. This knowledge will help you decipher marketing and product noise and find the right ETF for you.
Core Index: A foundation
These ETFs are the building blocks of your portfolio. They track broad market indices like the S&P 500, ASX 200 or MSCI World index. They aim to replicate the performance of the market and do it cheaply with no frills.
The purpose of this type of ETF
These ETFs spread your investment across hundreds or even thousands of investment securities – they are not limited to equities but can also provide broad bond exposure. They diversify your risk so that the impact of one company or sector will not make or break your return although it is still important to understand the underlying composition of the ETF.
Just because an ETF is passive does not mean it is perfectly diversified across all risks. I’ve written an article here about the underlying bets that passive investors are taking.
Most core equity ETFs are market-capitalisation weighted. This means that the larger a company’s market value, the larger its weight in the index.
For example, the S&P 500 ETF (IVV) that tracks the top 500 companies in the US has 34% of assets in the top 10 holdings.
You’re also getting similar exposure if you invest in a global passive ETF, like the Betashares Global Shares ETF BGBL. 29% of assets are in the top 10 holdings, and 72.97% of the ETF’s assets are in one country – the United States.
The largest US technology companies now account for a historically high share of global equity indices. Technology companies dominate BGBL, making up 30.07% of the assets. If Apple, Microsoft, Nvidia, Alphabet and Amazon perform well, your portfolio benefits disproportionately. If they struggle, the concentration will offer less protection than what many investors expect.
The picture doesn’t look better when we look at the ASX 200, with 44% of assets in the top 10 holdings, with a particularly large concentration in the top 2 holdings. Further, Australia’s top 200 stocks are largely concentrated in two industries – Financial Services (32.37%) and Basic Materials (21.73%) (at November 30th 2025).
Although investing in an ETF that tracks a broad market index sounds like a neutral, sensible decision, it means that your portfolio is constantly allocating more capital to what has already appreciated, and less to what has fallen behind.
This isn’t a flaw – it is how the indexes are designed. Market capitalisation weighting assumes that you should allocate more to the largest company – this is the bet that you are making as an investor. You are betting that today’s winners will continue winning.
Investors should be aware of this concentration risk in the markets that they are investing in, but historically passive investing has been a successful strategy for investors. Core index ETFs provide long-term investors with passive, broad market exposure that is cost effective.
How an investor might use this type of ETF
Typically, these ETFs make up the bulk of an investor’s portfolio if they invest in ETFs. They form the foundations that anchor your portfolio. Investors who follow a strategy called the Core-Satellite approach also heavily rely on these Core Index ETFs.
This strategy has a ‘core’ of foundational, broad market index ETFs. Then there is a Satellite – these are ETFs that make up a smaller part of the investor’s portfolio that tilts exposure in directions that may add or reduce risk across the portfolio. For example, an investor may choose to include an ETF in their Satellite portion that focuses on small-cap ASX stocks that will tilt their portfolio towards different exposures.
Factor ETFs: Find a tilt
Factor ETFs filter investments based on ‘factors’ or different characteristics. They usually focus on historical drivers of return – such as value (relatively cheaper stocks), quality (strong profitability and robust balance sheets), momentum (stocks that have performed well recently), low volatility or yield. Factor indexes are rules based – they have a set number of criteria that are used to determine whether a security deserves a place in the portfolio.
Multifactor ETFs also exist. Markets don’t always reward every style of investing equally, and multi-factor strategies combine factors to reduce the bet on just one factor.
The purpose of this type of ETF
The purpose of these ETFs are to offer you certain exposure in your portfolio in a systematic way which may be a way to outperform the market and may achieve a different objective. Factor ETFs are a way for investors to express their convictions, or to achieve the outcome their investment strategy is trying for. For example, an investor who is deriving income from their portfolio may choose a factor ETF that focuses on yield. An investor who is drawing down on their portfolio might focus on a factor ETF that has low volatility and focuses on capital preservation.
How an investor might use this type of ETF
More concentrated ETFs can be added to a portfolio to tilt it in certain directions. Investors that have specific portfolio goals such as income can use Factor ETFs to tilt towards these portfolio outcomes. Or an investor who believes that high-quality companies will continue to reward long-term investors could invest additionally or solely in a quality factor ETF. This will bias their portfolio towards companies that have strong fundamentals.
Thematic or Sector ETFs: Belief in a narrative or bolster diversification
There’s been a lot of buzz around thematic ETFs. These specific ETFs focus on trends and themes that get investors talking. They focus on specific sectors of the market (such as technology) or themes (such as Artificial Intelligence or clean energy).
The purpose of this type of ETF
Thematic ETFs offer the ability to home in and increase exposure to a particular sector, whether it be non-cyclical industries that may have more predictable dividends or technology that is under-represented in Australian broad market index ETFs.
Thematic funds tend to be niche offerings built around hot trends which may falter when the initial excitement fades, often leaving investors disappointed.
How an investor might use this type of ETF
Before we run through how an investor should use thisa thematic of ETF, let’s explore how investors are currently using this type of ETF.
Our global colleagues explored thematic ETFs and their outcomes in depth in the Morningstar Global Thematic Funds Landscape 2024. Two key findings stand out: Most thematic equity funds fail to beat a broad global equity benchmark, and over 60% of them have shut down in the past 15 years. That’s a sobering record.
Another Morningstar study, The Big Shortfall underscored this danger by showing that investors generally struggle with timing their investments, especially when it comes to more volatile or narrowly focused strategies. Over the past five years, thematic funds had a total return of 7.3%, while investors only earned a 2.4% return given poor timing decisions.
The report dives deeper into the potential causes of this gap. Either way, it results in poor investor outcomes. This tendency is amplified in trend-driven products that lack broad diversification or long-term viability. Ultimately, investors were hoping for quick wins which weren’t always provided. A lack of depth in conviction resulted in trying to time these investments.
Should an investor avoid thematic funds altogether? Not necessarily. Rather than jumping into what’s trending, focus on understanding the economic rationale behind the theme. An investor should gauge whether this theme is supported by structural long-term drivers, like demographics, innovation, or regulation, or if it is simply riding a short-term wave. Additionally, it is also prudent to review whether an existing fund with a diversified core portfolio already provides some exposure to such themes without needing to take concentrated bets.
For some investors sector ETFs can offer diversification where Core ETFs fail. We spoke about the concentration of the Australian market in two sectors – sector ETFs can offer further diversification into other industries such as technology which are lacking in broad market ETFs for this market.
Multi-Asset ETFs: All in one
Multi-asset ETFs offer investors simplicity without sacrificing diversification.
These ETFs blend multiple asset classes into a single fund. Multi-asset funds include pre-mixed options in superannuation. They have exposure to Australian and international equities, fixed interest, commercial property, cash, alternative assets and more. Some are static (for example, 60% equities, 40% bonds) while others adjust dynamically based on prevailing market conditions.
These ETFs give you a near-complete portfolio in one product – but it is just like buying any product off the shelf. These ETFs are not completely customised to what you are trying to achieve, and the fund may mandate future decisions that may not be in your best interests. However, they offer investors simplicity and a hands-off approach where the fund will automatically adjust for risk and rebalance at set intervals.
How an investor might use a Multi-asset ETF
A hands-off investor may use a multi-asset ETF to take portfolio decisions out of their hands. They may decide on the key asset allocation and exposure that they need for their portfolio and allow professional management of the underlying securities.
This is what most people in Australia do with their superannuation.
Final thoughts
Investment products, including ETFs, are a means to an end. They are a tool to get you to your financial goals.
No single ETF is the ‘best’, but it can be the ‘best’ one for you and your circumstances. Understanding the types of investment products that exist, the purpose they suit and how they can fit into a portfolio can help with making the decision of what to include, and what fits your investment strategy.
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