What an index fund is
A share index is a list of companies. The S&P/ASX 200 is the 200 biggest companies on the Australian Securities Exchange. Global indexes cover thousands of companies in the US, Europe, Japan and beyond.
An index fund simply buys every company in its index, in proportion to their size. You can hold one as an ETF (exchange traded fund), bought and sold on the ASX like a share, as a managed fund, or through your super fund’s indexed option. Nobody picks winners, so it’s cheap to run.
Why it usually wins
- You get the market’s return. Some companies soar and some fail, but you own all of them.
- It’s spread out. One company going bust barely moves an index fund.
- It’s cheap. Index funds often charge 0.1% to 0.3% a year. Actively managed funds often charge 1% or more.
- Most stock pickers fall behind. S&P’s SPIVA scorecards for Australia find that most actively managed Australian share funds do worse than the ASX 200 over 10 to 15 years.
The Australian market leans heavily on a few big banks and miners, so many investors add a global index fund to spread their money further.
What fees cost you
$10,000 invested for 30 years, growing 7% a year before fees:
| Yearly fee | After 30 years |
|---|---|
| 0.1% | $74,017 |
| 1% | $57,435 |
| Difference | $16,582 |
The fee comes out every year, and so do the returns it would have earned. The compound interest calculator shows growth with your own figures.
Over 30 years, a 1% fee costs you
$16,582
- You keep (1% fee)$57,435
- Lost to the higher fee$16,582
Assumes a 7% return every year before fees. Real returns vary, but fees come out every year.
Your super is invested for decades, so its fees matter most of all. A typical balanced MySuper option charges about 0.85% a year. Compare yours with the ATO’s YourSuper comparison tool, which also shows funds that failed APRA’s yearly performance test.
How index funds are taxed
Outside super, an ETF pays distributions, usually every quarter or half-year. They’re taxed at your marginal rate, even if you reinvest them, and Australian shares often come with franking credits for tax the company has already paid. You get a tax statement each year.
When you sell, a gain is taxed with a 50% discount if you held it for more than 12 months: see capital gains tax explained. Index funds rarely sell their holdings, so they usually pass on fewer gains than active funds.
Picking your own stocks
It can be fun, and some people do well, but:
- A few stocks are risky: one bad result can wipe out years of gains.
- Brokerage and tax add up if you buy and sell often.
- It’s hard to tell skill from luck over a few years.
If you want to try, keep it to a small share of your money, and the rest in index funds.
How to start
Check your super first: switching to a low-fee indexed or diversified option is often the easiest win. Outside super, open an account with a broker and buy an ETF that tracks Australian or global shares, or a diversified ETF that holds both. Some brokers register the shares in your own name (CHESS-sponsored), while others hold them for you, so check which you’re getting.
Invest money you won’t need for at least 5 years, add to it regularly, and keep going when markets fall: selling in a panic turns a temporary fall into a real loss. Start with investing basics if you’re new.