ASX ETFs are booming. Should you join in?

ASX exchange-traded funds (ETFs) are no longer a niche investment. They’ve become one of the fastest-growing parts of the Australian sharemarket.

Today, around two million Australians invest through ASX ETFs, attracted by their simplicity, low costs and ability to gain instant diversification without having to pick individual shares or hire an expensive fund manager.

And the momentum is only building. According to ASX data, ETF trading activity increased 26% during the last financial year, comfortably outpacing the broader sharemarket, where trading rose 22%.

So, what’s behind the surge, and are there any risks investors should keep in mind?

Why investors love ASX ETFs

The appeal of ASX ETFs is easy to understand. Instead of researching dozens of companies, investors can buy a single ETF and instantly gain exposure to hundreds of shares, bonds or other assets.

Some track the entire Australian sharemarket. Others focus on global shares, technology, healthcare, dividends or specific investment themes.

Fees also tend to be significantly lower than those charged by actively managed funds because most ETFs simply track an index rather than trying to outperform it.

For long-term investors, that combination of diversification, transparency and low costs has proven incredibly attractive.

Many ETFs also pay regular distributions, making them popular with income-focused investors and retirees.

Perhaps most importantly, they’re easy to buy. Investors can purchase ETFs through the ASX in exactly the same way they buy ordinary shares.

The market keeps getting bigger

It’s not just investor numbers that are climbing. The number of ETFs listed on the ASX has more than doubled over the past five years to 456 products. Last financial year alone saw another 72 ASX ETFs launched, according to ASX data.

Meanwhile, funds under management across Australia’s ETF industry have now surpassed $350 billion, highlighting just how quickly the sector has matured.

That’s good news for investors because it provides more choice than ever before. Whether someone wants exposure to Australian blue-chips, US technology giants, emerging markets or fixed income, there’s now likely to be an ASX ETF designed for that purpose.

More choice also means more risk

However, rapid growth brings its own challenges. As investor demand continues rising, fund managers are racing to launch new products targeting the latest investment trends.

Artificial intelligence has become the newest battleground.

Several ASX ETF providers have recently launched AI-focused funds that promise investors exposure to companies expected to benefit from the AI revolution. Examples include the Global X Artificial Intelligence ETF (ASX: GXAI), the Betashares Global Robotics and Artificial Intelligence ETF (ASX: RBTZ) and the VanEck Global Defence ETF (ASX: DFND), which also has meaningful exposure to AI-driven defence technologies.

While thematic ETFs can provide targeted exposure to exciting industries, they often carry higher risks than broad-market index funds. Many hold relatively concentrated portfolios, while others launch after a sector has already experienced a significant rally.

In other words, investors may end up buying into yesterday’s hottest trend rather than tomorrow’s biggest opportunity.

Foolish takeaway

The growth of ASX ETFs reflects a broader shift towards simple, low-cost investing. With two million Australians now using ETFs and more than $350 billion invested in the sector, they have become a mainstream way to build long-term wealth.

But as the number of available products continues to explode, investors should remember that not all ETFs are created equal. Choosing a diversified, well-constructed fund remains just as important as deciding to invest in an ETF in the first place.

The post ASX ETFs are booming. Should you join in? appeared first on The Motley Fool Australia.

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Motley Fool contributor Marc Van Dinther 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.